13 July 2026 · Risk Free Rates Team
Term SOFR vs. Overnight SOFR: Which One Actually Applies to Your Loan?
Term SOFR and overnight SOFR are built from the same market but behave very differently in a loan. Here's how each is calculated, when lenders use which, and what it means for your interest.
Anyone who has looked at two SOFR-based loan term sheets side by side has probably noticed they don't always reference the same "SOFR." One might set its rate once at the start of the interest period. Another might build it up daily, day by day, and only know the final number once the period is over. Both are legitimate, widely used conventions — they're just different tools built from the same underlying market, and the difference matters for how a loan's interest actually behaves.
This post lays out how Term SOFR and overnight SOFR are each calculated, why they can diverge, and which one you're likely to encounter depending on the kind of loan you're looking at.
Two Rates, One Source Market
Both benchmarks ultimately come from the same place: the US Treasury repo market, where SOFR itself is calculated daily by the New York Fed from actual overnight borrowing and lending transactions (see our guide to SOFR for the full mechanics). Where they diverge is in when that information gets baked into a rate.
Overnight SOFR (sometimes called "spot" or "daily simple" SOFR) is backward-looking. Each day's rate reflects transactions that already happened, published by the New York Fed around 8:00 a.m. ET the next business day. When a loan compounds overnight SOFR — most commonly Compounded SOFR in Arrears — the interest owed for a period isn't fully known until that period is nearly finished, because it's built from realized daily rates rather than a forecast.
Term SOFR, administered by CME Group and endorsed for certain uses by the Alternative Reference Rates Committee (ARRC), is forward-looking. Rather than compounding realized rates after the fact, CME Term SOFR Reference Rates are published each business day for four fixed tenors — 1-month, 3-month, 6-month, and 12-month — derived from trading activity in SOFR futures contracts. Because it's built from futures pricing rather than historical transactions, Term SOFR reflects the market's expectations for where rates are headed, not just where they've been. That's why Term SOFR can move in anticipation of a Fed decision, while overnight SOFR only moves after the Fed actually acts.
How CME Actually Builds Term SOFR
The mechanics are more involved than a simple average. According to CME Group's published methodology, Term SOFR Reference Rates are derived from transaction data across thirteen consecutive one-month SOFR futures contracts and five consecutive three-month SOFR futures contracts. CME calculates volume-weighted average prices from trading activity observed across several intervals throughout the day, then runs those through a projection model to produce the published 1-, 3-, 6-, and 12-month rates. The result is a rate that's set once, at the start of an interest period, and then held fixed for that period — the borrower and lender both know the rate in advance, unlike an in-arrears structure.
Where Each One Actually Gets Used
This isn't just a technical distinction — the ARRC has specific guidance on where each benchmark belongs, and it matters for what you'll actually see on a term sheet.
| Product type | Typical benchmark | Why |
|---|---|---|
| Multi-lender / syndicated business loans | Term SOFR | Operationally resembles LIBOR-era term-rate loans; rate known in advance simplifies multi-lender coordination |
| Middle-market and trade finance loans | Term SOFR | ARRC specifically flagged these as cases where an overnight-rate transition was operationally difficult |
| Bilateral business loans, legacy LIBOR fallbacks | Term SOFR | Recommended as a fallback option for contracts that couldn't easily reference other SOFR conventions |
| Consumer products (adjustable-rate mortgages, student loans) | Overnight SOFR / SOFR averages | ARRC explicitly recommends against using Term SOFR here |
| Floating rate notes, most securitizations | Overnight SOFR / SOFR averages | Same rationale — ARRC steers these toward the overnight-based conventions |
The ARRC's reasoning is largely about hedging efficiency and market depth: the overnight SOFR derivatives market is highly liquid, so instruments that can reference it generally get the most cost-effective hedging. Term SOFR was preserved specifically for the loan structures where an overnight rate is operationally awkward — mainly business and syndicated lending — rather than as a universal replacement for LIBOR's old term-rate role.
What This Means for Your Interest Calculation
If your loan references Term SOFR, the calculation is comparatively simple: the rate is fixed at the start of the period based on the tenor that matches your reset (1-month, 3-month, etc.), and it applies for the whole period regardless of what happens to the underlying market in between.
If your loan references overnight SOFR — typically compounded in arrears — the calculation is more involved: each day's published SOFR rate compounds against the prior balance, often adjusted by a lookback period or observation shift, and the total isn't final until the period closes. This is also why in-arrears structures are insulated from short-term news; a hawkish Fed statement or a soft jobs report can move Term SOFR immediately (because it reprices futures), but it has no effect on overnight SOFR until the Fed's actual administered rates change.
Frequently Asked Questions
Can I choose between Term SOFR and overnight SOFR on my loan? Usually not after the fact — the benchmark convention is set in the loan documentation and reflects what your lender's facility was built to support. Business and syndicated loans are more likely to offer Term SOFR; consumer and retail products are steered toward overnight-based conventions by ARRC guidance.
Is Term SOFR "riskier" than overnight SOFR? Not inherently — they're different tools for different structures. Term SOFR trades off the certainty of a known rate for the full period against slightly less market depth for hedging compared to overnight SOFR derivatives.
Does Term SOFR include a credit spread? No. Like overnight SOFR, published Term SOFR rates are risk-free-rate benchmarks. Any additional compensation for credit risk is layered on separately as a credit adjustment spread set in the loan agreement.
Why did some legacy LIBOR loans move to Term SOFR specifically? Because Term SOFR's fixed-in-advance structure most closely resembles how LIBOR itself worked, which made it a smoother operational fallback for contracts that weren't built to handle a daily-compounding, backward-looking rate.
Calculate Either Convention
Our free RFR Loan Calculator supports both Compounded SOFR in Arrears and Term SOFR, so you can see exactly how each convention flows through to total interest — including a full daily rate ledger and Excel export. Browse our full blog for more on SOFR, SONIA, €STR, and how Fed policy reaches different loan structures.