How to Compare Seller Financing Rates

Seller financing is the process by which a seller--be it of real estate, a vehicle or a small business--finances some of the purchase price of the item and accepts monthly payments over a period of time at a particular interest rate. The arrangement is usually formalized with a promissory note. Depending on the price of the item, like in the case of a business, the loan may also be secured with other collateral such as a home.

Difficulty: Moderate

Instructions

1. Collate all of your purchase price options. If you are comparing the prices of homes or businesses or even motorcycles, start with your purchase price options. The lowest purchase price however may not be the best choice as you will need to consider other factors listed below.

2. Compare interest rates and length of the loan. Make a list of the interest rates of your seller financing options as well as for how long your financiers are willing to lend you the money to make your purchase.

3. Create an amortization schedule. This allows you to see on one page your total payments over the life of the loan, including principal and interest, and how much your purchase will ultimately cost.

4. Compare collateral requirements. The less stringent the collateral requirements of a particular loan, the more favorable the loan will be. However this will be taken in concert with the other factors outlined above.

5. Make your choice. Put all of this information on a spreadsheet so that you can make a fair comparison. In the end, you may discover that a loan with a slightly higher interest rate and a shorter lifespan with no collateral requirements may be a better deal than one with a lower interest rate and stricter collateral requirements.

References

• About Selling Financing when Buying a Business
• Seller Financing in Real Estate Transactions

Resources

• More about Seller Financing