Using a business loan calculator offers an indication of how much it could cost to take out a business loan. More useful than that is to understand how certain interest rates on products are calculated, to give you a clearer idea of both the value and cost of business loans.
What Do You Know About Your Business Loan Costs?
Do you know exactly how much your loan is costing you? Has it been clearly explained to you?
When you take out your loan most lenders are obliged to explain to you how much the loan finance will cost including charges. Some do, some don’t. And if you are struggling to get finance in the first place this opens you up to having to accept much higher rates than you initially thought when you first scoured the market looking for business loans.
All Business Loans Are Built From The Same Materials
There are really just three important aspects to how much your business loan will cost you:
- Interest Rate
- Loan Amount
- Repayment Terms
But with different loan products being used for different uses these three aspects become more complicated and we can include APR, annual interest rate, monthly repayments, total repayment, initial payment, final payment, outstanding balance, compound interest, discounted rates and instalment loans. All of these combine to make your business loans vary in cost and affordability.
Not All Interest Rates are Created Equal
Depending on what type of loan you take out will dictate how much you will pay and what your effective interest rate will be.
Various factors are considered when applying the interest rate to a business loan. For one, there is currently no legislation regulating how APR is calculated across different lenders whereby fees can either be added or removed from what their advertised APR.
How is the loan interest rate calculated?
Your loan product, and the length of time you take to pay it back, will dictate how expensive it becomes. A loan of £1,000 taken over 12 months at an interest rate of 3% will become increasingly more expensive, in interest rate terms, the shorter the term. However, overall, if you take a longer-term loan, you will pay a lot more for it.
Here are three examples of loan products showing how they differ in cost and interest rate:
Standard Interest Loan Rate
The interest rate is the percentage of money that is paid back by the borrower over and above the amount of the loan agreed upon. This is basically the charge from the lender for using their money.
This amount is often confused with a specified APR (annual percentage rate) and is usually highlighted to the borrower as the loan’s advertised rate before they seek further details.
For most personal loans it is relatively easy to calculate the interest rate, although there are more ways than one in which the bank can calculate the amount of interest you will pay.
Most banks and lenders will quote the APR of a loan, but that will be different to the actual rate of interest on the loan, this is because APR is the result of the effects of compounding interest.
For instance, if you had a one-year loan of £1,000 and you paid £30 of interest in that year, your interest rate would be 3%. Your APR would also be 3% as there is no compound interest to multiply.
But if you took the same loan out for six months, and you still paid £30 in interest then your effective APR will be much higher. Your interest rate would be 6%.
And for a 90-day loan that APR shoots up to 12%. Taken to its ultimate conclusion we can see how this applies to the poor value offered by payday loan companies, although these are typically for smaller loan amounts and much higher starting interest rates (i.e £100 borrowed over 15 days, total payable £115, APR 390%).
Discounted Loan Interest Rate
A discounted loan product will remove the interest payments before advancing the principal loan amount to the borrower. But the effective rate of interest on this type of loan isn’t necessarily better value for the borrower.
In the same loan example, when borrowing £1,000 over a 12-month period when your loan interest rate is 3%, then a standard loan would mean paying back £1030.00 in total, in 12 monthly payments of £85.83.
But for a discounted loan with an interest rate of 3%, you would borrow just £970 (less the calculated 3% interest of £30) meaning you would pay £80.83 in 12 monthly payments. However, because you have received a smaller principle sum, your effective interest rate for your borrowing rises to 3.1%.
Instalment Loan Interest Rate
These loans are worked out slightly differently from standard loans as they include the cost of the finance too which makes them more expensive than either standard interest or discounted interest loans.
Most finance loans, covering assets like cars or other large purchases, are usually instalment loans, where monthly repayments and terms are agreed typically between 1-3 years with an initial deposit received. To work out what your interest rate is on these means dealing with more figures and a larger equation.
What Are Additional Fees?
Some lenders don’t include additional fees on their advertised rates. These arrangements and guarantee fees are often subsequently tacked onto the loan without explanation (or at least found somewhere in the small print). Whatever these fees are, it’s important to know what they mean and how they affect the cost of your loan.
Fees are especially important to consider when comparing and deciding on different loan products. However, they can be complex and varied.
A Setup Fee (e.g. Arrangement Fee or Processing Fee) is the cost that your lender charges you for processing the paperwork attributed to your loan. This fee can be a percentage of your loan amount or a flat fee. For any two loans offering an interest rate of 7% if one product has an arrangement fee of 1% and another 2.5% then this can alter the cost of each product, especially on larger-sized loans.
The Interest isn’t so much a fee as the inherent charge by the lender for using their money. As already discussed this isn’t always as straightforward as a simple percentage figure.
You may also be subject to Early Repayment Fees. For long-term and high-value loans, thee are commonplace – you will often find them attached to mortgages. These fees are there to protect the lender and ensure that they benefit in full from the profits from the combination of term and interest rate as set out in the loan contract. These kinds of charges are becoming less frequent, but this is all the more reason to be wary of them.
For secured loans, Security is also a fee that is attached to a loan. You may be required to put up your assets which are then held against your unpaid loan. While not a monetary fee, they can limit any further borrowing capabilities.
Just like on your monthly credit card statement Late Payment Fees can also add up. So, if for some reason you cannot afford your monthly repayments, you are likely to be charged the usual administration fee for doing so.
Other fees can include solicitors fees, security checks, underwriting fees and annual administration charges. Be clear on what all the fees and charges mean on your loan contract before signing.
Funding Guru Loans Have No Hidden Fees
If your business needs help with cash flow, we are one of the UK’s top alternative lenders. One of our business loans can help. We offer:
- Low Rates
- No Hidden Fees
- Loans For any Purpose
What usually impresses clients the most is the effort taken to get to know your business, so that we can offer you the most beneficial loan package for your circumstances. We want to know what makes your business work and that are comfortable with your repayments.
Unlike the banks, our loans have no hidden fees and no nasty surprises.
We offer a full range of secured and unsecured loans for every sector and reason. We provide bespoke financial solutions to make sure that the cost of your business isn’t outweighed by the cost of your business loans.
