A business loan may be the only option for you to gain the equipment, or start up costs, that you need. You may think that the amount you borrow, plus some interest, is what you need to pay back. Since you need the money now it is fair that you pay a little more than you borrowed.
There is more to it than that. You cannot understand the actual cost of a loan until you understand what the Annual Percentage Rate (APR) is, and how it is calculated. Investopedia defines it as the yearly amount that you agree to pay back to the lending agency over a set amount of time.
- Fixed Interest Rate-If you have a fixed interest rate the only number that you will need is the total amount being charged to you over the length of the loan. This is the best option when obtaining a loan if you want a set amount that you need to pay. Your monthly payment will always be the same, with no chance of inflation affecting it.
- Variable interest rate-If your loan has a variable interest rate you will never truly have an exact amount of interest that you owe. As the market fluctuates, up or down, your interest charges follow. It is a gamble on your part to go with this type of loan, but if you obtain it when rates are high, you could feasibly end up paying less over time.
- Principal-You will need to have the exact amount of the loan that was given to you to figure out the APR, which in turn will give you the actual amount that you will have to pay.
- Loan Term-This is the total amount of days that you have to pay back the loan. This is usually a set amount that is defined in the original contract that you sign. The longer the term is, the more interest that you will normally have to pay.
Now, to figure out your actual APR, you will need to do some math. The equation may seem complicated, but if you take one section at a time you will be able to do it. Most lenders today will tell you what your rate is throughout the life of the loan, but if they do not, or if you simply want to check, plug your numbers into the following formula to figure out the true cost of business loans Australia.
APR=Fees +Interest /Principal. That number/loan term. That numberX365. That numberX100
Confused yet? A sample might help clear up any confusion that you may have. Let us say that you have a 5-year loan (1825 days) for the amount of $10,000. The added fees together are $500 and the total interest rates are $1000.
It is that simple to find out the APR. Once that is completed, you would take the principal amount of the loan and multiply it by the percentage rate that you have found.
If you have a fixed rate loan this will be how much your loan will cost you in total. If you have a variable rate you will have to complete this formula every year to get the total amount. Each time you plug the numbers in you will first have to find your new principal amount by subtracting your payments from the original amount of the loan (plus last year’s interest amount). It will not be possible to figure out the actual cost of the loan until you have paid it back. You can use the formula above to get a close estimate, however, which is beneficial when you are trying to compare loans through various lenders.