Accrued Interest – What is it? and how to calculate it?

Grab your copy of the EIDL amortization schedule:

Hi everyone welcome back to the clara cfo group channel what is accrued interest what is accrued interest you’ve probably heard that a lot of places and especially if you have gotten any of the stimulus loans over the past year you might be wondering well what does that really mean at the end of the day so that is what this video is about i hope it’s helpful to

You um this is also applicable we’re going to talk about this in the context of ppp and eidl loans however this is applicable really for any type of loan that you get into the first time i heard the term accrued interest was when talking about student loans okay so this video might be broadly helpful to both business owners talking about these specific stimulus

Loans but really any interest any type of loan that has accrued interest all right so i hope this is helpful to you if it is please go ahead and click the thumbs up button on this video click the like button it would certainly help me out and make sure you’re also subscribed to the channel all right well what is accrued interest okay interest is charged on any

Type of loan that has an interest rate which is pretty much an any loan if it if it is doesn’t have an interest rate it’s probably not a general loan that you would have out at the bank or maybe you have a zero percent interest rate for a certain amount of time that’s great but most loans have interest charged on them so when you have interest on a loan you

Are getting charged based on the principal so let’s say your loan amount is ten thousand dollars and then an interest rate is charged on that loan okay and when it accrues and you’re not paying on the loan that means it’s accumulating so the word accrue just think of it as the word accumulate okay so if you are not paying on the loan and this is the case for

The ppp and the eidl loans when you first get the money the loans start accruing or accumulating interest from day one okay day one they are charging the sba is charging you interest so that has been a little bit confusing people because they didn’t um they didn’t necessarily know they thought maybe interest only starts once they start paying back a loan but

That’s not the case both of these programs even though you don’t have to pay on them right away you are accruing interest so we’re gonna i’m gonna pull up my calculator which is available for download if you want it i’ll put that link in the description box below but um we are going to show you the calculator that shows you what that actually looks like so when

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You have an interest rate charge it essentially adds it on to the principal or the amount that you have to repay so you’re building and building and building in buildings that’s the downside like this happens with certain student loans where you think you might you know sign up for a student loan you didn’t realize oh interest was actually accruing those four or

Five years i was actually in college oh so my twenty thousand dollar student loans of all of a sudden become a forty thousand dollar student loan just because of the interest that continues to accumulate when you’re not making any payments so this is a very very key factor and one of the reasons that i bring this up today is because i was on a call with somebody

Asking about their eidl loan and they didn’t realize that their loan was accumulating interest but they didn’t really actually need the loan they were considering repaying it so once we discuss this concept this client said hey i i don’t want to hold on to this money because i’m essentially being charged for money that i don’t need so i’m going to go ahead and

Pay it back all right so that’s why we’re talking about this concept today and i want to show you guys exactly what that means and exactly what that can look like with your specific numbers and before anybody gets too concerned just remember with ppp the interest rate is accruing on ppp but when you get that loan forgiven the sba will also forgive any accrued

Interest okay i’m actually seeing that being broken out on the statements when the sba notifies the bank and then the bank notifies you it says you know forgiven ppp loan is x amount and then interest interest that’s also forgiven is x amount okay so don’t you don’t need to worry if you know you’re accruing interest and then the ppp loan is forgiven you might

Think oh no i’ve got that little extra interest portion then i’m going to have to pay back but that’s not the case okay even if your ppp loan is not 100 forgiven let’s say there’s 10 that is left over then you’ll only have the obligation of the interest on whatever is not forgiven if that makes sense okay so the sba will forgive any any part of the forgivable

Loan the interest associated with ever with whatever is actually forgiven well let’s go ahead and dive into a screen share where i’m going to show you what accrued interest can look like on an eidl loan all right here we are in that eidl amortization schedule and this is the one that i said was available for download in the description box it is totally free

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It’s available to you you can plug in your own numbers in this spreadsheet and then i have another video on that as well i’ll try to link that in the description box below as well um but what i want to walk you through is showing you what it really means when we’re talking about accrued interest and again accumulated interest so once you plug in all of your numbers

Up here um the principal amount is always going to be the amount of a loan that was actually given to you so that’s kind of the face value of the loan it is you know in this example eidl if you got an eidl loan the 20 000 was the amount that was deposited into your bank account okay this is that principal amount that’s a term we use in loan lingo um and then the

Term of the year is usually both um sometimes described in in years and in months so it’s 30 years and 360 months and then your interest rate in this loan in particular is a 3.75 annual interest rate but for this loan it’s actually compounded on a daily basis okay so that can that can affect the interest rate a good bet um and then we have the payment start date

And the interest date have been listed here but what i want to show you is this table because this essentially helps us calculate what is the actual interest that is being built up over time okay so what we’re looking at here is the balance of the loan starts at 20 000 and then the one month’s interest was 61.64 cents so what we do is we add this interest to the

Balance and then that becomes the new balance you’ll see like this new balance is essentially the column e plus column f is the new balance and then that new balance gets transferred down to the next month carried forward and then the next month’s interest is charged on that so the way that i have this interest calculation is based on the daily rate so you’ll

See it kind of fluctuate mostly trending upwards but if you’re in a situation where a month only has 28 days like february then um it could you know the amount will look a little bit lower for example uh 59 of interest was charged for february you know for example so um when january has 31 days it had a higher amount of interest so that’s why you’ll see that in

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The calculator um but essentially so we can look and we can see okay basically this business is having to carry and pay 60 to 65 dollars just to carry this money whether or not they’re using it or not and with eidl the payments were originally deferred for one year and now they’re deferred for a full two years so this amount just keeps on growing so you’ll see

At the end of that those two years you will see that a 20 000 loan has become a 21 486 loan okay so now then payments start kicking in after that and that’s when the amounts will start to go down but i just want this to be really clear to you guys especially for those of you who got hundred thousand dollar loans two hundred thousand dollar loans three hundred

Thousand dollar loans this interest can be very very significant so you have to make the determination does it make sense for you to be accruing this money at this point in time or maybe you want to go ahead and start repayment even before you have to because you’re essentially just you know basically getting charged for holding on to this money if you you know

Haven’t used it but you get charged when you are whether you are using the money or you aren’t using the money whether you’re repairing or you’re not repaying you’re still accruing interest it is accumulating okay so i just wanted to make sure that that was really clear for you guys over here on the side this shows how much is accumulated in year one and how much

Was accumulated in year two all right so i hope that makes accrued interest super clear and easy to understand okay you guys well i hope that was helpful to you use this information to help you make a better decision for your business okay if you think hey i you know doesn’t make sense for me to hold on to this money and because i don’t need it and i don’t want

To have to repay all of that extra funds just within accrued interest then you know you can consider paying that back i do have a video specifically on repaying your eidl loans so i will link that in the um in the cards above so you can check that out i hope that’s helpful you guys talk to you soon bye

Transcribed from video
Accrued Interest – What is it? and how to calculate it? By Clara CFO Group