Question

You have approached your local bank for a start-up loan commitment for $360,000 needed to open a computer repair store. You have requested that the term of the loan be one year. Your bank has offered you the following terms: size of loan commitment = $360,000, term = one year, up-front fee = 25 basis points, back-end fee = 40 basis points, and rate on the loan = 8 percent. Assume you immediately take down $161,000 and no more during the year. Calculate the total interest and fees you will pay on this loan commitment.

Answer 1

25 basis points means 0.25% and 40 basis points would be 0.40%. The upfront fee is paid on the whole amount of loan (whether used or unused). Backend fee is computed on the unused portion of the loan and the interest on loan would be computed on the used portion.

Used Portion of loan = $161,000

Unused portion of loan = $360,000 - $161,000 = $199,000

Total Interest and Fees

Particulars	Amount
Upfront Fee	$360,000 x 0.25% = $900
Backend Fee	$199,000 x 0.40% = $796
Interest on loan	$161,000 x 8% = 12,880
Total Interest and Fees	$14,576