Step-By-Step Procedure To Calculate Interest Rate On The Line Of Credit Loan

If you are a person who runs a small scale business, then a line of credit can be a useful way to meet short-term borrowing needs. This works just the way loan taken by credit card does. A business line of credit works much like a credit card but here you only take the funds you need instead of the wholesome.

Coming to the possible interest rates, the Lenders often maintain different policies but most use the average daily balance method for figuring finance charges or the interest rates. This makes calculating the line of credit payments a straightforward and a flexible task.

Find the Monthly Interest Percentage:

line of credit calculator

To accomplish this, you can start with calculating the percentage interest for the billing period, also called as the periodic rate. Now, divide the whole interest rate with 365 days, and the percentage of interest you get should be multiplied by the number of days in the billing period. So, here you have the total interest to be paid for the given billing period.

Calculate Average Balance of New Purchases

line of credit calculator

Subtract the date of the purchase from the rest of the days in the billing period and multiply the number by the interest rate per day which we obtained from the above step.

For an instance, let us imagine that you made two purchases each for $100. One with 20 days remaining and one with 10 days. You have 20 times $100 divided by 30 and 10 times $100 divided by 30, post this, you will be getting two amounts and adding these two numbers you will get the average daily balance for new purchases of $100.

Compute Average Daily Balance

Take the average balances attained from the above step to calculate the average daily balance. And, if the initial amount balance is $1,000 and the average balance of newly purchased ones come up to $100, then the average daily balance comes down to $1,100.

Finally, the Line of Credit Payment Interest

calculating line of credit

Now, take the interest rate from the first step and multiply it by the average daily balance. As per the above one, if the interest rate is 0.59 percent and the average daily balance is $1,100, the interest comes down to $6.60. Find the beginning balance for the upcoming billing cycle by adding this amount to the ending balance and subtracting the payment.

2 thoughts on “Step-By-Step Procedure To Calculate Interest Rate On The Line Of Credit Loan

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