Loan schedules and lines of credit

Each installment split into interest on the balance and repayment of the loan, the total interest over a loan's life, a shorter term against a longer one, a flat-rate quote, and interest on a line of credit charged on the amount drawn each day.

Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.

1. What you will learn

You will build a loan's schedule month by month, total the interest over its life, compare a shorter term with a longer one, see through a flat-rate quote, and price a line of credit by the day.

2. What you already have

You have traced a loan through the account — the lump arriving, the repayments leaving — and split a single repayment into interest and principal. This lesson runs that split month after month into a schedule, works out what a loan costs over its whole life, and prices the other common way to borrow, the line of credit.

3. Words this lesson uses

4. Interest on what is still owed

A business borrows 10,000 dollars for equipment at 8 percent a year, repaid over thirty-six months. The lender works in months: 8 ÷ 12, about 0.667 percent a month. The installment that clears the loan exactly in thirty-six equal payments comes from a standard formula,

where L is the sum borrowed, r the monthly rate and n the number of months. Here it gives 313.36 a month. Every lender and spreadsheet uses it; what matters for the owner is what happens inside each installment.

Each month the interest is the monthly rate of what is still owed, and the rest of the 313.36 repays the loan. As the balance falls, the interest falls and the repayment share grows, until in the last month nearly all of the installment is principal. Over the whole term the business pays 313.36 × 36 = 11,280.96, of which 1,280.96 is interest.

Only the interest is a cost on the income statement; the repaid part reduces a debt on the balance sheet. The cash forecast carries the whole installment.

Term	What it means
Principal	The sum borrowed, and whatever part of it is still owed.
Installment	The fixed payment made each month on a loan.
Amortization	Repaying a loan by installments that cover the interest and a growing share of the principal.
Term	How long the loan runs, in months or years.
Flat rate	A quoted rate charged on the whole sum borrowed for the whole term, ignoring repayments.
Line of credit	Money the bank lets the business draw up to a limit, with interest only on what is drawn, for the days it is drawn.

Month	Owed at the start	Interest	Repays the loan	Owed at the end
1	10000.00	66.67	246.69	9753.31
2	9753.31	65.02	248.34	9504.97
3	9504.97	63.37	249.99	9254.98

Another way: steps

Charge the month's interest on the balance at the start.
Take it from the installment: the rest repays the loan.
Take that from the balance for the month's closing balance.
Start the next month from that balance.
Total interest is everything repaid less the sum borrowed.

5. The method, step by step, and how to check it

Turn the yearly rate into a monthly one. Divide by twelve, since the lender charges each month.

Charge interest on the opening balance. The balance owed at the start of the month times the monthly rate.

Split the installment. The installment less the interest is the part that repays the loan.

Carry the balance forward. The opening balance less that part is the closing balance and next month's opening balance.

Check the schedule in two ways. Across each row, interest plus repayment must equal the installment. Down the whole schedule, the repayments must add up to the sum borrowed and the last closing balance must be zero; a few cents left over is only rounding, which lenders absorb in the final installment. And check the total cost the quick way: installment times months, less the sum borrowed.

6. Shorter or longer

The same sum can be borrowed over different terms. A longer term lowers the monthly installment, which helps a tight cash forecast, and raises the total interest, because the balance stays higher for longer. Borrowing 7,200 over two years at 330 a month repays 7,920; over three years at 230 a month it repays 8,280. The three-year loan costs 360 more and frees 100 a month.

Neither is right in general. The shorter term suits a business whose forecast can carry the higher installment comfortably; the longer term suits one whose low point would otherwise break its buffer. What is never sensible is a term longer than the life of the thing bought: paying for a van for two years after it has been scrapped.

7. The flat-rate trap

Some lenders, often at the point of sale, quote a flat rate. A flat 8 percent on 10,000 over three years means 800 of interest for each of the three years, 2,400 in all, repaid in thirty-six installments of (10,000 + 2,400) ÷ 36 = 344.44.

Compare the amortizing loan at 8 percent: 1,280.96 of interest. The flat rate charges interest on the whole 10,000 for the whole term, although the business has repaid about half of it on average, so its true cost is close to double the quoted rate. In the United States the federal Truth in Lending Act requires lenders to consumers to state an annual percentage rate (APR) that allows for this. Business loans are mostly outside that act, although California and New York now require similar cost disclosures for many small-business financing offers. Where no APR is given, build the schedule or total the installments yourself: comparing that figure, not the headline one, is the defense.

8. Where a loan shows in the three statements

A schedule row feeds all three statements, each with a different figure. The income statement carries only the month's interest, 66.67 in the first month of the equipment loan, because only interest is a cost of borrowing. The balance sheet carries the principal still owed, 9,753.31 at the end of that month, as a liability; lenders and accountants often split it into the part due within a year and the part due later. The cash-flow statement shows the whole installment, 313.36, leaving the account, usually with the interest and the repayment of principal on separate lines.

This is why a business with a large loan can show a modest cost on its income statement and still feel squeezed: most of each installment is repayment, which leaves the account but never reaches the income statement. The cash forecast, which carries the whole installment, is the place to judge whether a loan is affordable.

9. Security and guarantees

Lenders reduce their risk in two common ways. A secured loan is tied to an asset — the van, the building, the equipment it paid for — which the lender can take and sell if the repayments stop, as the first course's lesson on legal forms showed when it paid the secured lender first. Secured loans usually carry lower rates for exactly that reason. An unsecured loan has no such asset behind it and costs more.

For a small company, a lender may also ask the owner for a personal guarantee: a promise to repay from their own money if the company cannot. It quietly undoes the protection of limited liability for that debt, so an owner reads it as seriously as the loan itself, and knows the full list of guarantees they have signed.

Before signing, also read what happens if the business wants to repay early. The schedule shows that paying off a loan in its first year saves most of its interest, because the early installments are mostly interest; some lenders charge a fee for early repayment for exactly that reason. Knowing the fee in advance lets an owner judge whether a good year should go to clearing the loan or to the buffer.

10. Lines of credit: flexible, and priced by the day

A business line of credit lets the owner draw money, up to an agreed limit, whenever the account runs short, and repay it when customers pay. Interest is charged only on the amount drawn and only on the days it is drawn, usually worked out daily, and many banks add an annual or monthly fee for keeping the line open.

At 0.05 percent a day, 2,000 drawn for ten days costs 2,000 × 10 × 0.0005 = 10 in interest. That is cheap for a short gap and expensive for a long one: 0.05 percent a day is about 18 percent a year, well above most loans.

So each kind of borrowing has its job. A line of credit covers the timing gaps the cash forecast shows — a quiet month, a large customer paying late — and should be paid back down to zero within weeks. A loan pays for something that lasts, over a term no longer than its life. Paying for equipment with a line of credit leaves the line permanently drawn at a high rate; and many lines are reviewed each year and can be cut or withdrawn by the bank, which tends to happen exactly when they are needed most.

11. In the world: a café that paid for its fit-out twice

A café owner fitted out a second site for 24,000 and, short of time, paid the builders from the business line of credit, meaning to arrange a loan later. The line of credit's rate was the equivalent of about 18 percent a year, and more than 20,000 stayed drawn on the line for nine months. The interest came to roughly 24,000 × 0.18 × 9 ÷ 12, about 3,240, plus fees — and in the ninth month the bank reviewed the line and cut the limit, which nearly stopped the café paying its suppliers.

Her accountant arranged a five-year loan at 9 percent to replace the line of credit. On the standard formula its installment was about 498 a month, and its total interest over five years about 5,900: more in total than the nine months of line of credit, but spread over the years the fit-out would actually be used, at half the rate, with no risk of the bank withdrawing it. The first month's schedule showed 180 of interest and 318 of repayment; by the last year the split had turned the other way.

The line of credit went back to its proper job, covering the two weeks between paying suppliers and receiving catering invoices, and rarely cost more than 30 a month.

12. In the world: why lenders show a standard annual rate

Because quotes can be framed in many ways — flat rates, fees added to the sum, interest-free months followed by higher rates — consumer-credit rules in the United States make consumer lenders show a single standardized annual rate. Business loans are not always covered by the same rules, which is one more reason for an owner to build the schedule or total the installments themselves.

13. Where this goes wrong

Each installment is half interest, half loan. The interest share starts high and falls every month.

The whole installment is a cost. Only the interest is; the rest repays a debt.

A lower monthly payment is the cheaper loan. It is usually the dearer one in total.

A flat rate of 8 percent costs the same as a loan at 8 percent. It costs nearly twice as much.

A line of credit is a cheap way to buy equipment. It is priced and designed for short gaps.

14. The equipment loan's first month

15. Corner Bean's line of credit in February

16. Two years or three for Long Row Gardens

17. Your turn: 5000 owed at 1 percent a month, installment 250

18. Guided practice

Corner Bean borrows $12400$ dollars for a new counter at 0.5 percent interest a month, repaid at $2120$ a month. Fill in the first two months of the schedule, in dollars.

19. Guided practice

Complete the worked solution: a loan has $14200$ dollars owed. The lender charges 1 percent a month on what is owed, and the installment is $492$. Split this month's installment and find what is still owed.

20. Guided practice

Fixit Mobile borrows $19000$ dollars and repays it in $51$ equal monthly installments of $480$. How much interest does the loan cost over its life, in dollars?

21. Practice

Long Row Gardens needs to borrow $14400$ dollars. Quote A is $636$ a month for 24 months; quote B is $414$ a month for 36 months. Which costs less in total?

22. Practice

In this example a bank charges interest of 0.05 percent a day on whatever is drawn on a business line of credit, and a fee of $20$ dollars in any month the line is used. In June a florist drew $2700$ for $5$ days, repaid it, and later drew $2400$ for $7$ days. Fill in the month's charges, in dollars.

23. Practice

A car dealer offers a van loan of $12000$ dollars at a flat rate of $9$ percent a year over $4$ years, repaid monthly. Fill in what it costs, in dollars.

24. Somewhere new

A food truck owner borrows $10500$ dollars for a new griddle and fridge at 1 percent interest a month, repaid at $505$ a month. Fill in the first two months of the schedule, in dollars.

25. Lesson test

Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.

26. Test question

A salon borrows $8000$ dollars at 0.5 percent interest a month and repays $540$ a month. How much is still owed after the first installment, in dollars?

27. What you can do now

You can build a repayment schedule and price a line of credit. Tell someone why a flat rate of 8 percent costs far more than a loan at 8 percent. Next: the other ways to fund a business, and what each one really costs.

Working for the steps left to you

	Amount
Interest, month one
Balance owed after month one
Interest, month two
Balance owed after month two

	Amount
Interest, first period
Interest, second period
Interest for the month
Interest and fee together

	Amount
Interest over the loan
Total repaid
Monthly installment

	Amount
Interest, month one
Repaid, month one
Balance after month one
Interest, month two

$5000 - 200 = 4800$

Next month's opening balance.