Line of Credit Calculator
Line of Credit Calculator can be used to calculate the amount of interest that is due on the line of credit loan taken by the borrower and is different than the normal loan calculation.
Line of Credit Calculator
[ ∑ {(A x N) / n} + O ] x i
- A is the amount of each purchase made during the billing period
- N is the number of periods remaining in the billing cycle since date of purchase
- n is the number of days in the billing period
- O is the opening balance if any
- i is the rate of interest
About Line of Credit Calculator
The formula for calculating Line of Credit that most of the financial institution uses per below:
Wherein,
- A is the amount of each purchase made during the billing period
- N is the number of periods remaining in the billing cycle since the date of purchase
- n is the number of days in the billing period
- O is the opening balance, if any
- i is the rate of interest
A line of credit can be called as a revolving credit account. It has a borrowing limit that shall be set by the lender, which is similar to having a credit card account. But the caveat here is that one doesn’t receive an amount in a lump sum, which is usually the case with the traditional commercial loans. Instead, the borrower will borrow the amount only when he will make purchases, and again that can be used for any business purpose.
These kinds of features shall make a line of credit an attractive choice while borrowing for a shorter duration. There is no specific formula to determine the monthly amount. The lender or the credit institution can determine the payment size that shall depend upon factors such as the outstanding balance, the interest rate, and terms of the line of credit.
For Line of credits payments, calculating interest can usually be done by calculating the average daily balance method. The credit institution or the lender shall figure out the average balances during a period of billing and will charge interest that would be a proportion of the rate of interest (per annum) calculated for the billing period, based on the number of days.
How to Calculate using Line of Credit Calculator?
One needs to follow the below steps in order to calculate the interest amount.
Step #1: First of all, determine the interest rate proportionately, which is called as periodic rate and same can be done by dividing the annual rate of interest by 365 and multiplying the same by a number of days in the billing cycle, which is usually a month and that would be 30 days.
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Step #2: Now list down all the purchases made during the billing cycle. One now needs to multiply each and every purchase amount by the number of days that are remaining in the given billing cycle period and divide this output by a number of days in the billing cycle, which is usually a month, and that again would be 30 days. This result would average of new purchases.
Step #3: Figure out the opening balance of the account and add up the value arrived in step 2, which shall be the average balance for that billing cycle period.
Step #4: Lastly, to calculate interest outflow, multiply the value arrived in step 3 by the rate of interest that was derived in step 1, which would be the line of credit payment of interest.
Example
Mr. X is running a business in the town for nearly a decade and has been renowned for his quality and has created goodwill in the market. However, during recent times he has been facing difficulties in finding the short-term requirements due to huge investment done in the plant and machinery of the firm. The branch manager learned about this and provided his proposal for a line of credit.
Mr. X was impressed by the product and decided to go forward with it. It has been now 2 months since he has used this facility, and currently, he has an outstanding balance of $12,500. For the current billing period, he has done the following transactions:
The Bank charges 13.39% as the annual rate of interest, and the billing cycle has been decided as monthly.
Based on the given information, you are required to calculate the line of credit interest payment for the month of October 2019, assuming this bank uses the average daily balance concept.
Solution:
Since there is no fixed formula to calculate interest on the line of credit, it depends upon bank to bank, and here they are charging is based on the average daily balance concept.
First, we need to calculate the daily average balance.
Now we have two parts in the formula; first, we shall determine the average of fresh purchases and is per below:
Calculate Days remaining for the end of the billing period.
Then we will multiply each balance by the numbers of days remaining and divide it by 31, which is nothing but a number of days in October.
And will add them up to get the total average balance.
We will calculate the rate of interest that shall be applied to calculate the interest payment amount. 13.39% is the annual rate, and if we divide the same by 365 and multiply the same by the number of days in the month of Oct, which is 31. Therefore the rate of interest per month will be 13.39% / 365 * 31, which is 1.14% for the Oct billing period.
Calculate of interest payment amount using the following formula,
- =($3603.23 + $ 12,500) *1.14%
- = $16,103.23 * 1.14%
- = $ 183.13
Conclusion
As seen above, the line of credit interest can be calculated by way of simple interest instead of compound interest. In the above discussion, we have taken average balances and calculated interest, which are mostly adopted by the banks. As a final conclusion, the line of credit can be useful for short term purposes as opposed to term loans.
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