What if the prime rate drops after receiving term sheet?

April 16, 2025

by a searcher from University of Texas at Austin in Austin, TX, USA

I have received a term sheet from a lender based on the prime rate. What happens if the prime changes between now and closing? Will most lenders be willing to adjust their interest rate?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Assuming you are going to be on a variable rate, then the rate should adjust to the Prime rate at closing or adjust down post-closing. However, they quoted you a fixed rate based on Prime, you will want to ask the lender how they deal with declines in interest rates prior to closing. Unless something changes, I would not expect a change in the Prime interest rate in the near term. Inflation is still above the Fed's target of 2% at 2.8%. In addition, with tariffs there is a concern inflation could go up, so I expect the Fed to keep interest rates where they are at until they see how tariffs impact inflation. I think the markets have pushed back their expectation of the next rate cut until later this year. I hope that helps.

Reply by a searcher
from INSEAD in New York, New York, USA

I would also recommend including two additional provisions in both the term sheet and the definitive docs: (1) a clear specification of the frequency at which the rate adjustments will occur, and (2) a precise definition of the timing or effective date for each rate adjustment. Addressing these points explicitly will help ensure alignment and mitigate the risk of ambiguity during the term of the loan/relationship.

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