One of the most important lessons for an entrepreneur to learn is how to calculate loan payments. First, you’ll want to figure out exactly how much money you need to borrow. Having this amount in mind allows you to sort through loan options faster and find the best options for your needs.
Once you have narrowed your list down to a handful of favorite loans, calculating the payments will help separate the winners from contenders. You can start with a free online calculator, which will quickly provide an estimate of what your payments will look like.
Beyond the loan payment, you’ll want to look at other factors to get a better idea of the true costs associated with a given loan. Here are some basic pricing metrics to consider as you determine the cost of a loan:
Total Cost of Capital (TCC): Accounts for interest and fees to provide a total dollar amount.
Annual Percentage Rate (APR): Breaks down the cost in terms of a yearly rate.
Average Monthly Payment: Even if your loan has daily or weekly payments, it’s helpful to look at the monthly impact of the cost.
Cents on the Dollar: Shows how much you’ll pay in interest and fees for every dollar you borrow.
It’s worth noting that there are also factors to consider that aren’t always apparent in a loan’s disclosures. Keep a sharp eye out for hidden fees, which sometimes come in the form of early repayment fees or processing fees.
Calculators and pricing metrics can help figure out loan payments, but sometimes there are complexities that will require extra resources. The problem is that various lenders use different terminology and metrics for their loan products. This can make it difficult to compare your options.
To help bring clarity to the situation, the Innovative Lending Platform Association partnered with some of the industry’s lending platforms and other industry leaders to make SMART Box™ (Straightforward Metrics Around Rate and Total cost).
This comparison tool promotes common language and user-friendly disclosure standards. Additionally, the calculations and pricing metrics are designed to help small business owners understand the true costs of loans in order to make more confident decisions.
Currently, there are customized versions of SMART Box™ for term loans, merchant cash advances, and lines of credit.
Tools like SMART Box™ are just another arrow in your quiver as you review loan products and try to find the best one available for your needs. The most important strategy has been and always will be due diligence. Take your time when evaluating loans, and resist the urge to make assumptions.
If you encounter confusing loan disclosures, don’t hesitate to contact the lender with your questions. You can also reach out to Lendio’s finance experts for their insights.
By taking the time necessary to understand the unique terms and costs associated with each loan product, you’ll be prepared for success. You can navigate any complexities and move forward in the process with confidence.