5 Steps to Calculate Loan Payments and Costs – Borrowing money can be one of the most valuable things you do as an entrepreneur, but it can also be one of the most risky if you don’t know how to manage the debt. If you are thinking about borrowing money to start your own business, here are five steps to calculate loan payments and costs so that you have a more realistic idea of what your monthly expenses will look like in addition to other details that can help you get your business started.
Step 1 – Determine your interest rate
The first step in calculating your loan payments is finding out what interest rate you will be paying. If you have a business loan, it will likely have several interest rates, depending on how much money you take out and when. On a personal loan, there’s only one interest rate for your entire loan—but it might vary based on your credit score. To determine your interest rate, look at your business or personal loan documents. You can also call or email your lender to find out what rate you’re getting.
Estimate your monthly payment: Once you know your interest rate, use an online business loan repayment calculator to estimate your monthly payment. This tool takes into account all of the factors that go into making a monthly payment, including principal and interest payments as well as any fees you may have to pay. It also allows you to input multiple loans so that you can compare different scenarios side by side. For example, if you have two loans with different or separate terms and interest rates, entering both loans in a calculator will help you decide which loan is best for your business.
Factor in taxes: When figuring out loan payments and costs, don’t forget about taxes. Businesses are responsible for paying their own taxes, which means you need to calculate how much tax you owe each year before determining your loan payments. Use an online tax calculator to figure out your estimated annual tax bill, then add that amount to your loan payment.
Also Consider future loans: While working with lenders to determine loan payments and costs is often a good idea, remember that these calculations won’t include any future loans you might want or need in order to expand your business. After all, if you want more cash down the road, you’ll probably have to get another loan from somewhere else. Before taking out additional loans, make sure you factor them into your initial calculations.
Think about other costs: There are plenty of other expenses associated with starting and running a business aside from loan payments. These include things like office supplies, marketing materials, professional services (like accounting), utilities (if you rent space), etc.
Step 2 – Estimate how long you will keep the loan
When you take out a loan, you must repay it over time. The length of time you have before you have to start paying back your loan is called the term of your loan. The longer your term, or repayment period, for a loan, generally means a lower monthly payment but more interest paid over time. For example, if you borrow the sum of $10,000 at 4% interest with a 5-year term versus a 10-year term, your monthly payments will be about $100 less per month with that 5-year loan. However, you will pay almost twice as much in total interest on that shorter-term loan because you’ll end up paying off most of that original sum of $10,000 in only five years rather than 10 years. Most people choose a loan term between 3 and 15 years. Use our an online calculator to find out how long it will take you to pay off your loan based on different terms
Step 3 – Estimate your annual income increases
To use a loan repayment calculator, you need to know how much your annual income is going to increase. If you are just starting out in business and are unsure of how much your pay will go up each year, base your estimation on last year’s increase. For example, if you started in business with an annual salary of $40,000 then you could estimate that next year’s salary would be about $45,000. Step 4 – Get quotes from lenders: Once you have calculated your estimated monthly payments for both loans, it’s time to get some real numbers from lenders. Compare loan quotes from different lenders and see which one can offer you better terms. The best way to do so is by creating a list of potential lenders and calling them one by one. You should also ask them for their business loan repayment calculator so that you can calculate how much money they want from you every month.
Step 4 – Estimate your monthly payment over time
Decide how long you want to keep your business loan. Most business loans offer a set payment plan that lasts for a specific number of years, such as 3 years. Determine how much of each monthly payment will go toward paying down principal versus interest. The remainder is what you’ll need to pay on a monthly basis until your loan is paid off. For example, if your loan has an annual percentage rate (APR) of 10 percent and you have the sum of $20,000 left to pay off after three years, then divide $20,000 by 36 months (3 years) = $555/month in payments. ($555 x 12 months = $6,660). This means that each month you’ll be paying off $555 toward principal ($6,660 / 20,000), with a balance of around $1340 going toward interest ($6,660 – $555). In other words: You will be spending roughly 70% of your monthly payment on interest. At the end of 3years, you will have paid back about 30% of your original loan amount.
Step 5 – Increase your payment when you can afford the Loan
The last step is to decide how much you can afford to pay on a monthly basis. If you can get your payments up over $400 per month, there’s no reason not to do so; higher payments really start making a difference with your loan balance. If you need help calculating, check out a business loan repayment calculator. These are available for free online; just Google business loan calculator and you should be able to find one that works for you. Once you have an idea of what your payment will be, make sure it’s at least 10% of your income or more. You can always increase it later if you have extra money in your budget. Just don’t forget to increase it! Many people set their initial payment based on their income without taking into account other expenses they may have (such as student loans). Please try and leave your business enough money each month to cover all of your bills, even after paying off your loan.
I hope these ideas will inspire you to think about how to Calculate Loan Payments and Costs with ease before taking any loan.