Loan Constant

Loan Constant: What the Market Actually Requires

The loan constant is the number that lets you compare loans honestly. Two quotes at the same interest rate are not the same loan if one amortizes over 25 years and the other over 30, and an interest-only quote at a higher rate can still carry the lowest constant in the stack. Because the constant folds rate and amortization into one annual cash cost, it is the figure that actually determines debt service, and therefore DSCR, and therefore proceeds.

The sizing arithmetic is the daily use case. Maximum supportable loan equals NOI divided by the product of the minimum DSCR and the loan constant, which is why a lower constant translates directly into more dollars. This is the quiet reason interest-only periods exist: an IO loan's constant equals its pay rate, the lowest possible value, so IO structures support maximum proceeds under any DSCR test, which is how bridge lenders and debt funds justify leverage that amortizing bank debt cannot match. It is also why lenders defend themselves with sizing conventions: many banks and agency programs size to a fully amortizing constant, or to a stressed rate floor, even when the actual loan starts interest-only.

The constant's other job is the leverage test. Compare it to the cap rate: when the cap rate exceeds the constant, leverage is positive and every borrowed dollar raises the cash-on-cash return; when the constant exceeds the cap rate, leverage is negative and borrowing dilutes yield until NOI grows into the debt. Borrower mistakes cluster in two places: comparing term sheets on rate alone while ignoring amortization, and forgetting the payment shock when an interest-only period expires and the constant steps up to the amortizing level, a refinance risk lenders will price even if the borrower does not.

Why It Matters for Your Loan

The loan constant is the cleanest single-number test of what a loan really costs in cash and what it can really deliver in proceeds. It exposes when a lower rate is a worse deal, tells you instantly whether leverage will help or hurt your cash yield, and explains why two lenders quoting the same DSCR minimum offer different loan amounts. Commercial Lending Solutions compares every term sheet on constant, not just rate, and negotiates amortization and interest-only terms with the DSCR sizing math in view.