## Line of Credit Calculator

The 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 from 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

##### Table of contents

### About Line of Credit Calculator

The formula for calculating the Line of Credit that most financial institution uses per below:A is the amount of each purchase made during the billing period

**[ ∑{(A * N)/n} + O ] ***

*i*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 a revolving creditRevolving CreditA revolving credit facility refers to a pre-approved loan facility provided by banks to their corporate clients. It states that the companies are free to borrow funds from these financial institutions to fulfill their cash flow needs by paying off the underlying commitment fees.read more account. It has a borrowing limit that shall be set by the lender, 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 traditional commercial loansCommercial LoansCommercial loans are short-term loans used to raise a company's working capital and meet heavy expenses and operational costs. It is a kind of financing often used by small companies that cannot afford to raise money from equity markets and bonds. Banks and well-established financial institutions often provide commercial loans against the debtor's financial statements and credit score.read more. Instead, the borrower will borrow the amount only when he makes purchases, which can be used for any business purpose.

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 the terms of the line of creditLine Of CreditA line of credit is an agreement between a customer and a bank, allowing the customer a ceiling limit of borrowing. The borrower can access any amount within the credit limit and pays interest; this provides flexibility to run a business.read more. These features make a line of credit an attractive choice while borrowing for a shorter duration.

For Line of credit 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 to calculate the interest amount.

**Step #1:** First of all, determine the interest rate proportionately, which is called a periodic rate and the same can be done by dividing the annual rate of interest by 365 and multiplying the same by the number of days in the billing cycle, which is usually a month and that would be 30 days.

**Step #2: **List all the purchases made during the billing cycle. One now needs to multiply every purchase amount by the number of days remaining in the given billing cycle period and divide this output by the number of days in the billing cycle, which is usually a month, and that again would be 30 days. This result would average new purchases.

**Step #3: **Figure out the account’s opening balance 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 has been running a business in the town for nearly a decade, has been renowned for his quality, and has created goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price.read more in the market. However, in recent times he has been facing difficulties in finding the short-term requirements due to the 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.

The product impressed Mr. X, and he decided to proceed with it. It has been two months since he used this facility, and he currently has an outstanding balance of $12,500. For the current billing period, he has done the following transactions:

Date | Particulars | Amount |
---|---|---|

10-Oct-19 | Towards Billing 23AC | $3,000.00 |

15-Oct-19 | Salary and Wages 1S | $1,000.00 |

20-Oct-19 | Machine Repairs | $500.00 |

25-Oct-19 | Creditors Repayment | $4,000.00 |

27-Oct-19 | Computer Bill W3R | $800.00 |

31-Oct-19 | Nil | – |

The Bank charges 13.39% as the annual interest rate, and the billing cycleBilling CycleThe billing cycle is the time period between one billing statement and the next billing date that companies generate for its services and products sold to the customers. The cycle could be monthly, quarterly or even annually. read more is decided monthly.

Based on the given information, you must calculate the line of credit interest payment for 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 from bank to bank, and here they are charging based on the average daily balance concept.

First, we need to calculate the average daily balance.

**∑ (A*N/n)**

Now we have two parts to the formula; first, we shall determine the average of new purchases as per below:

Calculate the Days remaining for the end of the billing period.

Then we will multiply each balance by the number of days remaining and divide it by 31, which is nothing but the number of days in October.

And will add them up to get the total average balance.

We will calculate the rate of interest 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 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,

**Interest payment = [ ∑ {(A * N)} / n + O ] ***

*i*- =($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 using simple interestSimple InterestSimple interest (SI) refers to the percentage of interest charged or yielded on the principal sum for a specific period.read more instead of compound interestCompound InterestCompound interest is the interest charged on the sum of the principal amount and the total interest amassed on it so far. It plays a crucial role in generating higher rewards from an investment.read more. In the above discussion, we have taken average balances and calculated interest, mostly adopted by the banks. In conclusion, a line of credit can be useful for short-term purposes instead of term loans.

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