While calculating cost of line of credit cost, formula is (interest + commitment fees)/Usable loan amount*12. In the denominator do we have to deduct the interest cost and the fees from the face value of loan? If not then why it says usable loan amount?
Share
The formula for cost line of credit is just –
Interest rate + Commitment fees
It is shortcut forget about the usable loan amount.
Still here is the explanation
In carrying out a sound short-term borrowing strategy, one of the key decisions is selecting the most cost-effective form of short-term loan. However, this selection is often not a simple task, because each of the major forms has to be adjusted to be on a common basis for comparability. The fundamental rule is to compute the total cost of the form of borrowing and divide that number by the total amount of loan you received (i.e., net proceeds), adjusted for any discounting or compensating balances.
Hope this helps!
Net proceeds i.e, deducting those numerator values or just the face value of the loan?