man using a business line of credit calculator
By: rkapur
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Line of Credit Calculator: Complete Guide

A line of credit calculator is an excellent tool that will allow you to learn how much you have to pay each month.

A calculator can help you understand your current financial situation to find customized loan options based on your needs.

You can also use the line of credit calculator to choose the right loan amount and repayment plan.

This article will walk you through calculating your line of credit to make the best decision for your financial needs.

What’s a Line of Credit?

A line of credit is an agreement between a financial institution and a borrower that establishes the maximum amount you can borrow at any time.

There are different types of this financing, like a personal line of credit, business line of credit, home equity line, and others.

A line can be helpful for things like home repairs or unexpected expenses because it gives you peace of mind knowing that you have a certain amount of money available to you if you need it.

On the other hand, it might not be the best product for more substantial or one-time investments. If that’s your situation, loans are probably a better alternative.

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Line of Credit Calculator

Financial calculators are great tools that will help you determine the terms of your loan, as well as how much you can afford to borrow.

The Importance of a Line of Credit Calculator

A credit line calculator can help you calculate your credit monthly payment.

Remember that the lender will continue to charge interest on the outstanding amount. Every month when you pay, your principal will get reduced. But not by the sum you have paid.

This is because a portion of your interest payment will go to the outstanding balance of the loan.

The total amount payable to complete the borrowed amount will depend upon:

  • The rate of interest.
  • The outstanding balance on your credit.
  • The number of months left to complete the repayment.

Line of Credit Formula

Here’s the formula for a line of credit:

P = ( r x PV ) / 1 – ( 1 + r ) -n

What do the letters in the formula stand for?

  • P is the monthly payment you’ll need to make to complete the repayment. This is the amount that the formula will help you determine
  • r stands for the monthly rate of interest in decimal form
  • PV is the total amount you need to repay TODAY
  • n is the number of months in which you want to complete the payment

#DidYouKnow
If you look at the line of credit loan formula carefully, you’ll see that there’s a minus sign before the letter n. If you miss this, your calculation will be incorrect.

You should know that you’ll have to make this calculation every month. Why? Because the PV (the total loan amount you need to repay) changes monthly because you make monthly payments.

Also, you can use the formula to find out what your line of credit payments are.

Line Of Credit Formula: An Example

Now, let’s calculate and see the result of the line of credit payment calculator.

Let’s imagine you borrowed $20,000 on your credit; you need to repay this amount in 18 months. You know that your monthly rate is 1.5%. Because you need the decimal form, you’ll divide it by 100. So, your monthly interest rate is 0.015 in its decimal form (1.5% / 100 = 0.015).

#CaminoTip
If you only have your yearly interest rate, you can learn what your monthly rate is by dividing it by 12. For example, let’s assume that the yearly rate of interest is 18%. Then, 18% divided by 12 = 1.5%. So, the monthly rate will be 1.5%.

Will all this information, you can use the formula.

  • r = 0.015
  • PV = $20,000
  • n = 18

Here’s the formula for the line of credit again.

P = ( r x PV ) / 1 – ( 1 + r ) -n

The next step is to solve the equation:

  1. P = ( 0.015 x $20,000 ) / 1 – ( 1 + 0.015 )-18
  2. P = (300) / 1 – ( 1 + 0.015 )-18
  3. P = 300 / 1 – ( 1 .015 )-18
  4. P = 300 / 1 – 0.7649
  5. P = 300 / 0.2351
  6. P = $1,276

This means you must pay $1,276 for the first month of the 18 months to repay the $20,000 you owe on your credit.

If you do the calculations for the next month (now you only owe $18,724, and there are 17 months to pay), you’ll find that the new payment would be $1,255.52.

The third payment would be $1,235.99, and so on.

How Do the Interest Rates on a Line of Credit Work

As soon as the lender approves you, they give you a credit limit.

This is the maximum amount that you can borrow at any one time.

Your lender will also give you a borrowing limit, the maximum amount you can borrow on each occasion. You can withdraw all the money you want if you do not exceed the credit limit.

To repay a line of credit, you must make minimum monthly payments. These payments will be based on how much money you’ve borrowed and how long you’ve been borrowing it.

There are two main types of lines of credit: secured and unsecured. A secured line of credit needs collateral, such as a savings account or a piece of property. An unsecured line of credit does not require any collateral and is riskier for the financial institution.

#DidYouKnow
Banks, credit unions, and online lenders offer lines of credit to businesses in amounts ranging from $1,000 to $100,000.

Current Line of Credit Interest Rates

The interest rate on this option is usually variable, which means it can go up or down over time. The interest rate is based on the prime rate banks charge their best customers.

Interest rates on loans are always changing, but if you’re looking for an average, the personal line of credit offers 8% – 10%.

This is an average interest rate that applies across the board, but it’s possible to get a number lower or higher than this figure if you have good or bad credit scores.

You only have to pay interest on the amount you borrow from your credit. For example, if you have a credit limit of $10,000 and borrow only $5,000, you will only be charged interest on the $5,000.

The interest rate on this revolving option is usually lower than the interest rate on a credit card. This makes a line a good option if you need to borrow money for a short-term loan.

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Factors Behind the Cost of a Line of Credit

These are the different factors that go into the cost of a line of credit:

Terms

The length of time a lender approves for the borrower to repay a loan is called a term.

On average, term lengths of lines of credit are usually for 1 – 2 years but can be as long as 5 years.

The longer the term, the lower the monthly payment. Alternatively, the shorter the term, the higher rates you’ll pay.

Line of Credit Payments

Your monthly payment may also vary depending on whether you choose to make minimum payments or fully pay off your balance each month.

If you only make a minimum monthly payment, it will take longer to pay off your debt, and you’ll pay more interest.

However, if you can afford monthly payments, you can save on interest charges and repay your loan faster.

Fees

Some of the most common fees lenders may charge are application, monthly, annual, and origination fees.

There might be other fees, like late payment or prepayment.

Before applying, find out what fees you’re required to pay. Instead of or in addition to fees, some lenders secure this credit with some form of real estate property.

Annual Percentage Rate

Generally, the APR on a line of credit will be lower than the interest rate charged on a traditional loan because this has a shorter repayment period.

However, it is important to note that APRs can vary significantly from one lender to another, so it is always wise to compare rates before agreeing.

Additionally, some lenders may charge additional fees or penalties if you pay off your credit.

How to Reduce Line of Credit Costs

  • Only borrow for a line of credit withdrawals you can repay in 6 months or less.
  • Save money by shopping for the best terms, rates, and lender requirements.
  • Set up a budget to use the credit line wisely so you don’t overspend.
  • Make sure to complete your loan payments quickly.
  • After 6 months to a year, negotiate better terms with the lender.

Comparison With Other Financial Products

Line of Credit vs. Credit Card

A line of credit and a credit card are both types of loans, but they work differently. It is like a loan with a flexible limit.

You can borrow up to a certain amount, but you don’t have to use all the money at once. You can also borrow more money if needed, as long as you stay within your limit.

A credit card is different because it’s a type of revolving loan. This means you can keep borrowing money against your credit limit if you make monthly payments on time. You’ll pay interest on your debt if you don’t pay off your balance.

Line of Credit vs. Loan

First, this credit generally has a lower interest rate than a loan because the borrowing power is limited to the funds already in your account.

Second, repayment terms for a line of credit are typically much shorter than those for a loan, which means you’ll have to pay back the money more quickly.

Finally, lines of credit usually require periodic payments (usually monthly), while loans typically have one lump-sum payment at the end of the term.

A Loan Is a Better Alternative

A loan could be a far superior option. A loan is a fixed-amount loan that you must pay in total over a specific period.

Another reason a  loan is a better alternative for a line of credit is that, with a loan, you will have a fixed interest rate and monthly payment, making budgeting easier.

Second, you won’t have to worry about a charge-off if you miss a payment or two, as you can with a credit card. Finally, a loan allows you to build your business credit history, which can be helpful down the road.

Camino Financial’s startup business loans can offer tremendous advantages to entrepreneurs.

Business owners without a previous credit history are also eligible to apply.

There’s more good news for small business owners: Camino Financial never requires you to put up collateral to secure your loan. So, your personal and business assets are safe.

Our minimum requirements are simple and easy to comply with. All we need is that your business should have been in operation for at least 9 months and have a minimum of $30,000 in annual gross sales.

Additionally, loan applicants must have a social security number OR a tax identification number (ITIN).

Small Business Loan Calculator

Camino Financial’s small business loans can provide a cost-effective solution for your company’s fund requirements.

Not sure how to calculate the cost of a business loan?

We invite you to use our business loan rates calculator to determine your monthly payment and other loan terms.

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FAQs

What is a good interest rate for a line of credit?

Any rate less than 10% is considered a good rate.

Lenders charge the best interest rates to borrowers with:

  • Good to excellent credit scores and histories
  • A good financial ability to repay a loan
  • That pledged collateral as security

How much is the minimum payment on a line of credit?

The minimum loan payment amount varies per lender.

For example, some only require monthly interest payments, while others want borrowers to pay 2% of the balance due.

Paying the minimum amount indicates to lenders that borrowers cannot repay the loan.

How much of a line of credit can I get?

Your amount depends on several factors, including your credit score, income, and debts.

For example, if you have a good credit score and steady income, you may be able to qualify for a $10,000 credit. However, if you have a poor credit score or high levels of debt, you may only be able to qualify for a $1,000 line of credit.

How do I calculate the interest on a line of credit?

To calculate interest on this option, you’ll need to know the balance of your credit and the annual interest rate.

To get started, simply divide the annual interest rate by 365 to get the daily interest rate. Then, multiply the daily interest rate by your balance. Finally, multiply that number by the number of days in the year (365).

Is a line of credit your best choice?

A line of credit can be a great choice if you need to borrow money for short-term expenses, like a car repair or medical bill.

But if you’re using your line of credit to cover long-term expenses, like housing or education costs, you might be better off with a loan or a fixed-rate credit card.

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