Interest Rates Are Rising – Is Your Business Ready to Service Variable Rate Loans?

With inflation at a 40-year high, the Fed is doing its part to slam the brakes on customer demand. Over the past year, the Fed has hiked rates a total of 6 times – resulting in the fastest rate increase for a single year since the 1980s. The benchmark borrowing rate is now at its highest since the Great Recession, and it’s expected to increase further throughout 2023.

At a time of historically high rates and ongoing economic uncertainty, it’s no surprise that middle-market and other commercial lenders are showing greater interest in variable rate loan structures. The challenge, however, is that many lenders are just not set up to service variable rate loans.

For lenders that have primarily serviced fixed rate loans, transitioning to variable rate loan servicing can appear daunting. Fortunately, there are ways to get up and running fast. In this blog post, we will explore why variable rate lending is in greater demand today and how lenders can quickly adapt to this market change.

The Shift Toward Variable Rate Loans in Commercial Lending

Middle-market lending has thrived in recent years thanks to a number of external factors. In the aftermath of the Dodd-Frank reform, it became more challenging for banks to lend to middle-market businesses – opening up new opportunities for non-bank lenders. At the same time, the base rate was relatively steady, encouraging lenders to deploy straightforward fixed rate loan structures.

Now that interest rates are in flux, the appeal of fixed rate loan structures is wearing off. In today’s market, servicing fixed rate loans can end up being financially damaging. As costs of capital increase due to inflation, lenders need to increase their yield. Otherwise, their spread will shrink and their profits will pale in comparison to previous years.

The Challenges of Variable Rate Loan Servicing

Because variable rate loans are tied to dynamic rate indexes, managing them is a complicated process. Automated software can go a long way in simplifying the process, but because fixed rate loans have been so popular in recent years, there hasn’t been a real push to develop variable rate loan software. As a result, many variable rate lenders rely on cumbersome and outdated processes to manage their loans. 

Manual loan management isn’t just time-consuming and complex – it’s burdensome to implement. Because variable rate commercial lending software is limited, lenders are often forced to develop systems and processes from the ground up. This makes for a long and drawn-out go-to-market time, which is costly at a time when fixed rate loans are incurring greater losses by the day.

Introducing AXIS’s Out-of-Box Variable Rate Loan Management Solution

While the options for variable rate loan management software are limited, they are not zero. AXIS by AIO Logic is the first out-of-box solution that allows lenders to start originating variable rate loans within days rather than months. Our end-to-end software features user-friendly tools and modules for every step of the loan lifecycle — from origination, to underwriting, to compliance, and more. Plus, we offer support for fixed-rate loans and bespoke loan structures! Contact us today for a free demo of our solution.

Commercial lenders who service variable rate loans can better maintain their profits at a time of rising interest rates. Learn more about the value of variable lending in today’s market, and how lenders  can get started.

Learn how commercial lenders can maintain profits when interest rates are rising