Construction loans from either a bank or a private money lender can have a variety of terms and conditions. It can be confusing to understand what everything means. For example, there is a vast difference between interest rates on your real estate loans. It’s important to know the difference between Dutch and Non-Dutch so that you can be aware of all the costs that may incur. This can help you and your company avoid costs from loans that you didn’t account for, it can potentially help you save money, and most importantly it can help you make the right decisions. At LJC financial, we’re here to help and make sure that you have all the tools to make the best decisions.
What is Dutch Interest?
In the most basic sense, a Dutch interest loan is when a lender begins charging interest for a loan before the total amount of committed funds has been disbursed. The interest is not charged on the money actually drawn and used but on the total amount of the original loan. For example, you need a total of $4 million for a project over 3 months. A dutch interest loan structure will have the lender charging you the interest rate monthly of the full $4 million instead of what you’ll need per month. Even if you don’t use all of the $4 million, you will still be charged interest on it. In some states, such as the state of Texas, Dutch loans are illegal as they can be predatory and unfair to consumers.
What is Non-Dutch Interest?
Non-Dutch interest in the basic sense is when the interest is charged only on the number of funds actually given. Using the same example from above, let’s say you need $4 million over 3 months but actually just end up using $3 million. Well with Non-Dutch interest your interest rate is only charged on what you actually use. So instead of it being charged on the full $4 million and collecting interest on the whole sum for all 3 months like it would have in Dutch style interest loa. Even if you do need the whole $4 million, with Non-Dutch style interest, the lender charges interest as it’s distributed to you, not upfront.
Dutch Interest Loan vs Non-Dutch Interest Loan Example
A borrower is looking to buy a 100k house to flip and is also looking for an additional 50k to cover the renovations. The total loan amount that they are projecting to need is 150k for the purchase of the house and the renovations.
Typically the 50k for the renovations is held back by the borrower until a receipt for renovations has been shared with the lender. In this example, that would be the 10k for a roof that they want to add to the property.
- 100k + 50k for Renovation
- 150k total, plus interest on the total amount
- 50k is held back until the renovation is complete
- The roof is 10k, and you get the bill
- Give a 10k bill to the bank so the lender gives 110k
A Dutch Style loan will charge interest on the full 150k, even if 100-110k is all that has been advanced to the borrower. This increases the percentage of total interest. Some states have a cap on interest percentage rates, and Dutch-style loans often go beyond that in a predatory fashion. A higher interest rate is effectively applied on a 110k loan, as the Dutch style applies for the loan payments after the full 150k.
A Non-Dutch loan on the other hand will only charge interest on the lent amount. So only the 110k would be charged an interest rate.
See how LJC Financial Can Offer The Right Loan For You
At LJC Financial we believe that an informed consumer is a smart consumer and we’re here to give you all the information and tools to make your construction project as smooth as possible. Apply now or contact us and let’s discuss your lending needs to find the right loan solution that works for you.