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Business loan interest rates vary depending on the nature of the loan itself and the terms. The most common denotation of business loan interest rates is the annual percentage rate (or APR) which is a straightforward metric of how much interest is charged to the loan on an annual basis. For example, if the bank loans you $1,000 and charges $50 per year in interest, the APR would be 5%.

Depending on the repayment schedule, this may not mean that you pay 5% each year; it might mean that the average annual payment throughout the term of the loan is 5%, and that the amortization schedule prioritizes a seemingly higher amount in the earlier years of the loan. Some loans, however, are shorter than one year, and use the metric of an effective interest rate. In this case, the length of the term is considered as a fraction of one calendar year and the expected amount of interest becomes factored in to determine what the rate would be if annualized. So, for example, if the bank loans $1000 for a term of 100 days and asks for $50 in interest, the interest is multiplied by the quotient of the term and one year (50×100/365), yielding an effective interest rate of 13.69%

If the business loan exists in the form of a credit card or line of credit, the interest rate is considered to be revolving. In this case, the supplied interest rate reflects the amount that is owed on interest on the balance of the loan. It is not factored in or scheduled with the repayment of the loan, however, it just acts as a minimum monthly requirement that must be paid while the balance can remain unpaid indefinitely. So if you have a credit card with a 15% APR and have a balance of $2,000, your monthly payments on the card will be one twelfth of the percentage of the balance ($2000 x .15/12), or $25/month.

Another form of business loan interest rates exists in the form of discounted loans. A discounted loan is a loan in which the interest has been deducted from the principle before it is dispersed, but the full amount of principle and interest is expected in return. In this case, the interest rate reflects the amount of interest that is being subtracted from the total. Discounted loans are usually calculated in terms of effective rate, and can be amortized over a period of the loan.

This Business article was written by Mark Karavan on 11/17/2009