Learn How to Use a Business Loan Calculator and Avoid Bad Debt

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A business loan calculator is a great tool that allows users to estimate multiple variables associated with the credit instrument such as the total interest to be paid over the lifetime of the loan, the annual percentage rate (APR), and the monthly installment to be paid based on a series of inputs.

Understanding how these calculators work is important to analyze multiple different loan offerings, as business owners can modify the inputs in a way that allows them to identify the most convenient choice based on the size of the installments or the impact of fees and other charges in the cost of borrowing.

In the following article, we will explain how you can avoid bad debt through the use of these tools, using a calculator provided by online lending company Camino Financial as an example.

The benefits of using a business loan calculator

A business loan calculator has multiple uses. The first, and perhaps the most popular of those, is calculating the cost of borrowing by determining the total amount of interest to be paid over the lifetime of the loan.

To arrive at this figure, the calculator adds up the amount of interest to be paid in each of the installments, although interest charges are not necessarily the only expense associated with taking a loan.

In this regard, prospective borrowers should also incorporate the cost of certain fees and commissions required for the approval of the loan as is the case of closing, documentation, funding, and origination fees, as these extra payments could significantly increase the cost of borrowing.

For the purpose of estimating the impact of these fees, an advanced business loan calculator would return the annual percentage rate (APR) of the loan, which is the actual annual rate that borrowers would pay after including these non-interest payments.

Meanwhile, a business loan calculator can also be used to estimate the amount of the periodical installment to be paid, which is determined by using a financial formula employed by lenders.

Depending on the priorities of the borrower, the size of the installment might be a more important variable, in some cases, than the cost of borrowing when comparing multiple loans.

For this reason, a business loan calculator can be a useful tool when analyzing multiple loan options to ultimately pick the one that suits the needs of the borrower the best.

How to modify inputs in a business loan calculator to analyze multiple loans?

The different inputs added to a business loan calculator can modify the outcome of the loan in terms of the cost of borrowing, the APR, and the monthly installment significantly.

With that in mind, prospective borrowers can use these automated tools to identify the required terms and conditions of a loan to fulfill their objectives for these same variables.

For example, the interest rate and repayment period of the loan can be modified until the amount of the resulting monthly installment is in line with the borrower's payment capacity.

Meanwhile, when analyzing different loan offerings based on their monthly installment, borrowers can modify this particular variable to estimate the variation in the total cost of borrowing.

Finally, by adding and subtracting the fees associated with the loan, business owners can analyze the impact that these fees have on the annual percentage rate (APR) of the loan.

Bottom line

A business loan calculator is a great tool to analyze how convenient a given loan is based on the resulting cost of borrowing and effective interest rate to be paid.

Meanwhile, business owners can also rely on these tools to estimate the monthly cash disbursement that will be associated with taking these financial obligations while modeling multiple scenarios to determine the impact of different interest rates and repayment periods in the size of the installments and total borrowing cost.