Then, all you need to do is multiply the total amount borrowed, the number of days, and the daily interest together to calculate how much interest you owe for that period of time.” What is amortization?Īmortization is the process of gradually paying off the principal debt with regular payments plus interest. “Interest rate is generally expressed as APR, which stands for ‘annual percentage rate.’ This can be turned into a daily interest rate by dividing the APR by 365. “The easiest way to calculate loan interest and payment for set amounts of time is to transform everything into days,” Zhou said. “If you pay down the principal of the loan, all you need to do is update the original $1 million with your new total principal and the calculation is good to go!” Zhou added.Īlternatively, he said, you could calculate your loan payments on a daily basis by applying a similar process known as “actual/365.” Repeat this process for each subsequent month, adjusting the outstanding balance of the loan accordingly, to determine your payment.Your monthly payment on interest for the second month on the loan is $4,975.Multiply the new loan balance of $995,000 by the monthly interest rate of 0.005.If you wanted to understand the second month’s payment, you could simply apply the same formula with the new balance of the loan. Your monthly payment on interest for the first month of a $1 million small business loan would be $5,000.Multiply the monthly interest rate of 0.005 by the loan balance outstanding, which in this case is $1 million.This yields a monthly interest rate of 0.5% (expressed as 0.005). Divide the annual interest rate of 6% (expressed as 0.6) by 12, for the number of months in the year.To break this example down further, do the following: Loan payment = Loan balance x (annual interest rate/12)įor example, if you take out a $1 million loan with a five-year term and a 6% interest rate, you could easily figure out your monthly payment by applying the formula above, said Rex Freiberger, CEO of Discuss Diets. To determine your monthly payments, apply the following formula: Calculating an interest-only loanĪn interest-only loan is calculated by multiplying the principal amount of the loan by the interest rate percentage, which yields the annual interest payments owed on the loan. Calculating an interest-only loan, for example, is different from calculating an amortizing loan. Before calculating your loan payments, make sure you understand the type of loan. These formulas will help you calculate your loan payments. Once you understand these loan factors, you can begin to calculate your monthly payment.Įditor’s note: Looking for a small business loan? Fill out the questionnaire below to have our vendor partners contact you about your needs. “Critical is the deeper cash flow analysis the business owner must undertake to determine whether the business generates enough income to be able to make the loan payments comfortably.” “Loan types vary. The best advice for a novice is to speak with their attorney or accountant about what loan type may be more advantageous to them,” he said. You should also understand the type of loan you are applying for, said Erik Jacobs, partner at Cicero, France, Barch & Alexander P.C. “Small business owners should look closely at interest rate, payment frequency and any fees when evaluating loans,” said Jeff Zhou, founder of Fig. The interest rate of the loan, which is expressed as a percentage.The term of the loan, or length of time over which the loan must be repaid with interest.The principal amount of the loan, which is the total amount you borrowed. To accurately calculate what you would owe on an interest-only loan, you need to understand the following factors: Here’s how to calculate your expected loan payments before accepting funding to be sure your business can meet its debt service obligations. Before borrowing funds for your business, it’s smart to calculate what your monthly loan payment would be and whether you have the cash flow to support new debt.īusiness loans offer small businesses a way to access funding for growth more quickly than they could by saving, but irresponsible borrowing could lead to a business’s untimely demise. If you’re looking to secure a loan, you need to know how you’ll repay it.
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