Interest rate

Interest accrues on what you still owe, for the time you owe it. That single property distinguishes a loan from a purchase of receivables, and it is the reason interest rates and factor rates cannot be compared directly.

The mechanics that change the number

• Fixed or floating: a floating rate is quoted as an index plus a margin — prime plus 3, SOFR plus 4 — and moves when the index moves. The margin is the part you negotiate
• Day count: 365/360 charges a day's interest at 1/360th of the annual rate for each of 365 days, producing slightly more interest than the stated rate suggests. It is standard in commercial lending and rarely mentioned
• Compounding and accrual frequency: daily accrual on a declining balance behaves differently from monthly
• Default rate: many notes step the rate up on default, sometimes substantially, and apply it retroactively to the default date

Rate is not price

The note rate excludes origination fees, packaging fees, closing costs and any prepaid interest. APR is the measure that folds those in and is the only fair basis for comparing two loans. A lower rate with three points of fees is frequently more expensive than a higher rate with none.

Legal limits

Usury caps on commercial lending are a matter of state law and differ enormously — some states cap commercial rates, some exempt corporate borrowers, some exempt loans above a size threshold, and choice-of-law clauses are routinely used to select a permissive state. Whether that selection is honoured is itself litigated.