The headline rate on a private loan is rarely the whole price. A borrower comparing offers needs to add up every component over the expected life of the loan; a lender needs to do the same to know what it will actually earn. This entry explains each component and how they combine.
The building blocks
| Component | What it is | Typical form |
|---|---|---|
| Base rate | The floating benchmark the loan resets against | Term SOFR, usually one-month or three-month |
| Spread (margin) | The lender’s premium over the base rate for credit risk, illiquidity and work | Quoted in basis points, e.g. SOFR + 650 bps |
| Floor | A minimum level for the base rate | Protects the lender if rates fall |
| Origination fee | An upfront fee on the commitment, paid at closing | A percentage of the loan amount |
| Exit fee | A fee due on repayment | A percentage of the amount repaid; not universal |
| OID | Funding the loan at a discount to its face amount | e.g. the borrower owes 100, receives 98 |
| Unused fee | A fee on undrawn commitments | Common on revolvers and delayed-draw facilities |
| Extension fee | A fee to exercise an extension option | A percentage of the outstanding balance |
Caldrion’s published pricing is SOFR + 600–900 bps, or a fixed-rate equivalent, with an origination fee of 1–2%. Other fees, if any, are set loan by loan and appear in the term sheet. See our criteria.
SOFR and the floating rate
The Secured Overnight Financing Rate (SOFR) is the benchmark that replaced LIBOR for US dollar loans. Most private loans reference Term SOFR, a forward-looking rate published for one-, three-, six- and twelve-month tenors, so the borrower knows its interest rate at the start of each interest period. Interest is usually calculated on an actual/360 basis, which makes the effective annual cost slightly higher than the quoted rate.
A floating-rate loan passes interest-rate risk to the borrower: if SOFR rises, so does the coupon. Borrowers who need certainty can buy an interest rate cap or swap, and lenders on transitional real estate often require a cap so that a rate spike does not overwhelm the property’s income. Alternatively, a lender may offer a fixed-rate equivalent, pricing the loan at a single rate for the term.
Floors
A floor sets a minimum for the base rate. If a loan is priced at SOFR + 700 bps with a 3.00% floor, the coupon is never less than 10.00%, whatever SOFR does. Floors matter most when rates are low or expected to fall. A borrower should read the floor alongside the spread: a lower spread with a high floor can cost more than a higher spread with no floor.
Upfront fees and OID
An origination fee and original issue discount are economically similar: both reduce the cash the borrower receives relative to what it owes. The differences are mainly in accounting and tax treatment, which borrowers should take to their own advisors. In the broadly distributed loan market, OID is common; in direct lending, an origination fee is more usual.
Upfront fees compensate the lender for the work of origination, underwriting and documentation, and for committing capital. Because they are earned once, their effect on yield depends on how long the loan stays out: a 1.5% fee is worth far more per year on a loan repaid in 12 months than on one outstanding for three years.
Illustrative arithmetic: all-in yield
The following is illustrative arithmetic only, not a Caldrion quote.
A $20M bridge loan is priced at SOFR + 700 bps with a 3.00% floor, a 1.50% origination fee and a 0.50% exit fee. Assume SOFR is 4.00% throughout and the loan is fully drawn and repaid at the end of 24 months. Ignore day-count conventions for simplicity.
| Item | Calculation | Amount |
|---|---|---|
| Coupon | 4.00% + 7.00% = 11.00% a year on $20M for 2 years | $4,400,000 |
| Origination fee | 1.50% × $20M | $300,000 |
| Exit fee | 0.50% × $20M | $100,000 |
| Total lender income | — | $4,800,000 |
| Simple annual yield | $4.8M ÷ $20M ÷ 2 years | 12.00% |
If the same loan is repaid after 12 months instead, coupon income halves to $2.2M but both fees are still earned, so total income is $2.6M and the simple annual yield rises to 13.00%. That is why a lender cares about early repayment and why prepayment terms exist; see Amortization, call protection, PIK and interest reserves.
A more precise calculation discounts the cash flows and solves for an internal rate of return, which also accounts for the fee being received at closing and the exit fee at repayment. For comparing offers, though, the simple method above is usually enough to show which is cheaper.
What drives the spread
A spread is not set by formula. In our experience, the main drivers are:
- Collateral quality and coverage. A lower loan-to-value means more cushion and, other things equal, a lower spread. See Leverage: loan-to-value, loan-to-cost and debt multiples.
- Complexity and work. Construction draws, field examinations and borrowing-base monitoring take effort throughout the life of the loan.
- Speed and certainty. A borrower who needs to close quickly, or to replace a lender that has stepped back, is paying for something scarce.
- Term and size. Short loans may carry higher fees relative to their life; very small loans carry fixed costs.
- Structure. Payment-in-kind interest, interest reserves or future funding change the lender’s risk and are priced accordingly.
Fixed-rate equivalents
When a lender offers a fixed rate, it is usually derived from the floating price: the expected path of SOFR over the term, plus the spread, adjusted for the lender’s cost of bearing rate risk. A fixed rate gives the borrower certainty; in exchange, prepayment terms on fixed-rate loans can be stricter, because the lender loses the rate it locked in if the loan is repaid early.
Expenses
Beyond fees, the borrower usually pays the lender’s third-party costs: legal fees, appraisals, environmental reports, field examinations, title and lien searches. These are pass-through costs, not lender income, but they are part of the cost of the loan and should be budgeted. A term sheet often requires an expense deposit, and that clause is commonly binding even though the rest of the term sheet is not.
Questions to ask about any offer
- What is the all-in cost over the expected life, not only the first year?
- Is there a floor, and at what level?
- Are there exit, extension or unused fees, and when are they waived?
- What happens to the price if the loan is repaid early or extended?
- Which third-party costs will the borrower bear?
For examples of how these terms come together on real loans, see the terms tables in Project Juniper and Project Saguaro. To return to the chapter, see the overview of loan terms and documentation.
This entry is general information as of November 2026, not investment, legal or tax advice, and not an offer of securities.