Calculate the True Cost of Your Business Loan

03/03/2017 | by Mark Vega

If you own and operate a business, chances are that you may need to seek out additional funding at some point in your business’s lifespan. Additional funding can be just the thing your business needs to meet all of its obligations and continue to grow. Sources of funding have grown more plentiful in recent years. To the usual sources of banks, we can add alternative online lenders that make it easy to apply for additional funding in a matter of minutes.

No matter where or from whom you seek out a business loan, it’s important to keep in mind that the true cost of a loan is never just the amount you apply for, or the principal. Your true cost, rather, is the sum of the principal and the amount of interest that accrues over the time it takes you to repay the loan.

Let’s look at an example. You’ve consulted with your accountant and your team. You need approximately $40,000 to help you expand your business. You qualify for this amount with a lender.

  • Your principal = $40,000
  • Your quoted interest rate amounts to 10%
  • Your repayment period is 24 months
  • You have to pay $4000 in loan origination fees
  • Your loan also comes with a $50 monthly service charge.

As you can see, the additional charges plus the interest really add up. What started out as a $40,000 loan will actually be $49,929 once you’ve paid it back in full.

Let Nerdwallet Help You Calculate the True Cost of Your Loan

Obviously, $50,000 is a lot more than $40,000. Knowing how much you’ll actually need to pay back can help you consider whether you’ll really need as much you’re seeking. Having this information on hand before you’re actually on the hook can also help you determine whether or not you can afford the loan you’re seeking.

Online lender Nerdwallet offers a useful calculator for businesses seeking out loans. Their Business Loan Calculator lets you enter:

  • Loan amount (the principal)
  • Interest rate
  • Repayment period
  • Other fees

Once you’ve entered this information, the calculator will show you:

  • Your estimated monthly payment, including fees
  • The total interest amount
  • The total amount you’ll pay back at the end of the repayment period
  • The APR, or Annual Percentage Rate

That last number is especially useful when comparing different loans from different providers. As Nerdwallet says, the APR

Represents the true annual cost of the loan and makes it easier to do an apples-to-apples comparison between products. Some lenders do not provide APR and instead give a general interest rate that does not include any fees.

Check out Nerdwallet’s Business Loan Calculator. It’s a useful tool that gives you information you can use to determine the true cost of taking out a loan.