Secured Overnight Financing Rate (SOFR)

SOFR (Secured Overnight Financing Rate) is a benchmark interest rate published daily by the Federal Reserve Bank of New York. It measures the cost of borrowing cash overnight using U.S. Treasury securities as collateral. SOFR replaced LIBOR as the preferred reference rate for adjustable-rate commercial loans after LIBOR was phased out due to manipulation scandals.

As of March 2026, SOFR stands at 3.67%. Unlike the prime rate, which is set by individual banks (typically at the fed funds rate plus 3%), SOFR is derived from actual market transactions in the Treasury repo market, making it less susceptible to manipulation. The New York Fed calculates SOFR from roughly $1 trillion in daily repo transaction volume, giving it a deep liquidity foundation that LIBOR never had.

SOFR directly affects the cost of many commercial loan products. SBA 7(a) lenders can now use SOFR as an alternative base rate, and many conventional commercial term loans and business lines of credit are priced using SOFR-based spreads.

SOFR currently sits 308 basis points below the prime rate (3.67% vs. 6.75%), which means borrowers whose lenders offer SOFR-based pricing may see lower starting rates than prime-based products, though the spread above SOFR is typically higher to compensate. Understanding which benchmark your loan references is essential for comparing offers across lenders.

For borrowers with Commercial Real Estate loans or other large facilities, the choice between SOFR-based and prime-based pricing can translate to meaningful differences in annual interest expense, particularly when rate environments shift. Knowing how to read your loan's rate adjustment mechanism, including which SOFR variant it references and how often it resets, is a core part of managing interest rate risk.

Confusing SOFR with the prime rate. SOFR and prime move in the same direction but are different rates. Prime is set by banks at a fixed spread above the fed funds rate. SOFR is market-determined from overnight Treasury repo transactions. A loan at "SOFR + 4%" and a loan at "prime + 1%" may produce similar all-in rates, but they respond differently to market conditions.

Ignoring the SOFR variant. Lenders may reference daily SOFR, 30-day average SOFR, or CME Term SOFR. Each variant produces slightly different rates on any given day. Term SOFR, published by CME Group, is forward-looking and behaves most like the old LIBOR tenors that many borrowers are familiar with. Confirm which SOFR measure your loan agreement references before signing.

Assuming SOFR-based loans are always cheaper. While SOFR is lower than prime, lenders add larger spreads to SOFR-based products. Compare the all-in rate (benchmark plus spread), not just the benchmark. A loan priced at SOFR + 4.00% (7.67% all-in) is more expensive than one at prime + 0.50% (7.25% all-in), even though the SOFR benchmark itself is lower.

Overlooking credit spread adjustments (CSA). When legacy LIBOR loans converted to SOFR, many included a credit spread adjustment to account for the historical difference between LIBOR and SOFR. If you inherited a converted loan, review whether a CSA is embedded in your rate. New originations typically do not include a CSA, so refinancing a converted loan may change your effective spread.