Learn Guide
Why Cheap Debt Is Often the Most Expensive
Total cost to settlement matters more than headline pricing.
The pricing trap
When a broker selects a fund based on the lowest rate, they are optimising for one variable in a multi-variable equation. The cheapest headline rate often comes with the highest total cost to settlement — because the hidden costs accumulate elsewhere.
Hidden cost drivers
Time costs
A fund that offers 0.50% less but takes three weeks longer to settle costs the borrower more in holding costs, opportunity costs, and lost momentum than the rate saving delivers. Time is the most underpriced variable in private credit.
Retrade costs
Some funds are known for retrade behaviour: adjusting terms after approval based on DD outcomes, market movements, or internal capital shifts. Each retrade introduces delay, re-negotiation, and the risk of deal collapse.
Structure risk
Cheap debt often comes with structural constraints — restrictive covenants, tight LVR limits with no buffer, short extensions, or conditions that create execution friction. These constraints can turn a simple deal into a complex one.
Behavioural risk
Funds competing on price may have thinner margins and less appetite for deal complexity. When issues arise during DD or legal, they have less flexibility to work through problems and more incentive to withdraw.
The shift: total cost to settlement
Credit management focuses on total cost to settlement, not headline pricing. Total cost includes: the rate, fees, time to settle, probability of settlement, retrade risk, and the cost of failure.
How credit management reduces total cost
By selecting funds based on execution certainty rather than pricing alone, we reduce the variables that drive total cost up. A marginally higher rate that settles on time and without surprises is almost always cheaper than the headline winner that retraded, delayed, or failed.
Key takeaway
The cheapest rate is rarely the cheapest deal. Total cost to settlement is the metric that matters. Optimise for certainty, not headlines.
Apply this to a real deal
Why: Headline pricing hides execution costs. This tool reveals total cost drivers.
Do: Rate the delay risk, retrade likelihood, and client sensitivity for your deal.
Output: Whether headline pricing or execution certainty should drive your fund selection.
Total Cost Reality Tool
Step 5 of 8 — See why headline pricing is not the whole cost.
Headline pricing may matter more
Low execution risk means the cheapest option is more likely to deliver.