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ALSO VISIT
Bad Credit
Business Financing
Facts About Credit - Credit Report
Annuities
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Small Business Loans |
Business Loan Consolidations | InterestRate | Cost of Credit
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A small
business loan
can be personal or from a financial institution like a bank.
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COST
OF CREDIT
WHAT ARE THE TERMS OF THE LOAN?
Down payment
How much cash up front is required?
Term
How long do you have to repay the loan?
Interest rate
What are the finance or additional charges? The interest rate (the
APR) is the percentage cost of credit on a yearly basis. This is key
to comparing costs. |
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The Truth In Lending Act doesn't
set interest rates or other charges, but it does require that the
lender disclose the terms of the credit plan so that you can
"comparison shop" for credit. Other charges such as annual membership
fees, points, and transaction charges are not included in the APR.
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Interest Rate Example
Suppose you borrow $100 for one year and pay a finance charge of $10.
If you can keep the entire $100 for a whole year and then pay back
$110 at the end of the year, you are paying an APR of 10%. But if you
repay the $100 and finance charge (a total of $110) in twelve equal
monthly installments, you don't really get to use $100 for the whole
year. In fact, you get to use less and less of that $100 each month.
In this case, the $10 charge for credit amounts
to an APR of 18%.
Finance Charge
The finance charge is the total dollar amount you pay to use credit.
In addition to the charges imposed based on a periodic rate, it
includes other costs such as interest fees, service charges, annual
fees, late charges, and some credit-related insurance premiums.
Finance Charge Example
Borrowing $100 for a year might cost you $10 in interest. If there was
also a service charge of $1, the total finance charge would be $11.
METHODS USED TO CALCULATE FINANCE CHARGES
The method used to calculate the balance on which you pay a finance
charge makes a difference in the cost of credit.
Adjusted Balance
The adjusted balance method takes the amount you owed at the beginning
of the billing period and subtracts any credits and any payments made
by you during the period. New purchases are not counted.
Average Daily Balance
The average daily balance — one of the most common methods — adds your
balances for each day in the billing period and divides that total by
the number of days in the period. Payments and credits made during the
period are subtracted and new purchases may or may not be included.
Two-Cycle Average Daily Balance
The two-cycle average daily balance method uses the average daily
balances for two billing periods to calculate the finance charge.
Payments and credits made will be accounted for and new purchases may
or may not be included.
Previous Balance
The previous balance method bases the finance charge on the amount
owed at the end of the previous billing period. In open-ended credit
such as credit cards or gasoline cards, it is critical that we
consider the method used to calculate our finance charges because the
method will cause the amount of the finance charge to vary
considerably. It's difficult to figure out the finance charges once
you start using a card regularly and carry a balance on it. |
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Sources: Wikipedia, FCIC and other public sources.
Small Business Financing |
BusinessLoans | BusinessGrants
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