How to Analyse Your Loan Interest Rates: a Beginner’s Guide to Getting the Best Value

Saroj Shah
December 21, 2022

The demand for business loans in Australia has remained high with post-Covid recovery and a strong economic climate for SMEs. More and more business owners are exploring credit instruments to fund their operations and grow their businesses. If you are looking at your business loan options, you are probably comparing them by their interest rates. However, as experts will tell you, this approach is not enough. You need to analyse your interest rates in greater detail to uncover the best value while looking for loans. Whether you want short-term business loans or long-term financing, understanding your loan costs is essential for making the right choice. Let’s discuss how you can get the best value from your business loan!


Understanding Your Business Loan Interest Rate: Factors That Influence It

The lender charges an interest rate based on several factors. Here are the top aspects that play a role in determining your interest rate:

  • Security: Secured loans for larger sums of money often have lower interest rates. For example, if you opt for business vehicle loans, you can borrow a substantial amount with your new vehicle as collateral. In such a scenario, the lender will charge a lower interest.
  • Credit History: Lenders assess the creditworthiness of borrowers by evaluating their credit scores while approving loans.
  • Cash Rate: The Reserve Bank of Australia’s cash rate, a reflection of the current economic trends, can influence your interest rate.
  • Trading History: Your history of operating the business can have an impact on your interest rate. The lender may look at cash flow and revenue records to evaluate the situation.


Calculating Loan Costs: Using APR To Analyse Your Loan

While the interest rate is a critical component of your loan cost, it is not the only consideration. Your business loan can have other costs like:

  • Application or establishment fees to set up the loan account.
  • Documentation fees to cover processing and verification costs.
  • Direct debit fees to cover transaction charges during repayment.
  • Monthly or annual fees to maintain lines of credit or certain loan accounts.

All these costs may or may not be present in the loan of your choice. However, you should read the loan terms in detail to identify these additional costs. You can also have some rebates which lower your overall loan costs. Accounting for all these amounts can help you calculate the final cost of the loan.

Annual Percentage Rate (APR) can reflect the total cost of the loan taking into account the reducing balance of the loan amount after each perioding repayment. Here is an example to understand how to calculate the APR:

  • Assume you have borrowed $50,000 and have to pay $2590 as interest, this works out to a simple interest rate of 5.18% p.a.

Now, say if the loan needs to be paid in 52 equal weekly installments, the APR consdering the reducing balance at teh end of each week comes to 10% p.a.


How To Take The Final Call

Your final choice will depend on your priorities. You can consider the trade-offs between mortgaging an asset and paying higher interest to understand what the rate means for you. At the same time, you should consider the repayment term while comparing APRs. An extended loan period is usually less costly than a shorter repayment window. All these factors interact with your business circumstances to help you determine the best value for your loan.

If you need help choosing a business loan that works for you, reach out to the experts at Broc Finance today!

Saroj Shah

Saroj is the Head of Lending at Broc Finance. He comes with 13+ years of experience in small business lending and has a knack of structuring complex deals and get the best outcome for his customers.