How to Calculate Line of Credit Interest

A line of credit charges interest only on what you borrow, and only for as long as you owe it. That flexibility makes the interest harder to predict than on a fixed loan: the balance moves with your draws and payments, the rate usually floats with the prime rate, and the payment changes when the draw period ends. This guide shows how the interest is calculated at each stage, with a worked HELOC example.

How lines of credit differ from loans

• You get a credit limit and borrow (draw) as needed, up to the limit.
• Interest accrues only on the outstanding balance, usually daily.
• Most have a variable rate: an index (often the prime rate) plus a fixed margin.
• A draw period (often 10 years for a HELOC) lets you borrow, often with interest-only payments. A repayment period (often 20 years) follows, when the balance is paid off with principal and interest.

Personal and business lines of credit work the same way but are usually unsecured, with higher rates and shorter terms.

The daily interest formula

daily interest = balance × annual rate ÷ 365
monthly interest = sum of each day's interest in the billing cycle

If the balance changes during the month, each day uses that day’s balance. Some lenders use 360 days, which makes the daily rate slightly higher.

How the rate is set: prime plus margin

A HELOC might be priced at prime + 1%. If the prime rate is 7.5%, your rate is 8.5%. When the prime rate changes, so does your rate. A 1-point rise on a $25,000 balance adds about $20.83 a month to the interest. Many HELOCs have a lifetime cap and some a floor. Check your agreement.

Worked example: a HELOC through both periods

You have a $50,000 HELOC and draw $25,000 at 8.5%. The draw period is 10 years with interest-only payments, followed by a 20-year repayment period.

1. Daily interest: 25,000 × 0.085 ÷ 365 = $5.82.
2. Interest-only payment: about 25,000 × 0.085 ÷ 12 = $177.08 a month.
3. Repayment period: the $25,000 is amortized over 240 months at 8.5%, a payment of $216.96, 23% higher.
4. Total interest over 30 years: $48,319.39, nearly twice the amount borrowed, because nothing was repaid during the first 10 years.

The line of credit calculator runs this for any balance, rate and term. If rates have risen by the time repayment starts, the jump is bigger.

When the balance changes during the month

Because interest accrues daily, a draw or payment partway through the month changes the charge for just the days after it. Suppose your balance is $25,000 for the first 20 days of a 30-day cycle, and then you draw another $5,000, so it is $30,000 for the last 10 days, at 8.5%:

interest = (25,000 × 20 + 30,000 × 10) × 0.085 ÷ 365
         = (500,000 + 300,000) × 0.085 ÷ 365 = $186.30

The same logic works in reverse. A payment early in the cycle cuts the interest for every remaining day. If you have spare cash, paying it into the line as soon as you have it, and drawing again only when needed, keeps interest to a minimum.

Personal and business lines of credit

• Personal lines of credit are usually unsecured. They have higher rates than HELOCs, smaller limits and shorter draw periods, but your home isn’t at risk.
• Business lines of credit help smooth uneven cash flow, such as paying suppliers before customers pay you. Lenders look at revenue, time in business and sometimes ask for a personal guarantee. Many require the line to be paid to zero for a period each year.

The daily interest formula is the same for all of them. What differs is the rate, the fees and how the payment is set.

Your options when the draw period ends

When a HELOC moves into repayment, you typically have four choices:

1. Start the repayment schedule at the higher principal-and-interest payment.
2. Pay off the balance in a lump sum, using savings or the proceeds of a sale.
3. Refinance into a new HELOC, a fixed-rate home equity loan or a cash-out mortgage refinance.
4. Convert to a fixed rate, if your lender offers a fixed-rate option on the outstanding balance.

Start planning a year or two before the draw period ends, while you still have time to compare offers and while your credit and home value are known.

How to cut the interest on a line of credit

• Pay principal during the draw period. Even small extra payments reduce the balance that every day’s interest is charged on.
• Draw only what you need, when you need it. Interest starts on the day you draw.
• Lock a fixed rate on part of the balance if your lender offers it and you expect rates to rise.
• Watch the end of the draw period. Plan for the higher payment years ahead, or refinance before it arrives.

Line of credit vs. an interest-only loan

Both can have interest-only payments for a time, but they work differently:

• An interest-only loan has a fixed amount borrowed upfront and a set interest-only period. It is often used for mortgages or investment property. See the interest-only loan calculator.
• A line of credit is revolving. You can borrow, repay and borrow again during the draw period, so the interest follows your balance.

Before opening a line, check how much total debt your income supports with the loan affordability calculator. To compare a line’s rate with a quoted payment on a fixed loan, the interest rate calculator shows the implied rate.

Common mistakes

• Planning only for the interest-only payment. The repayment-period payment is much higher.
• Ignoring variable-rate risk. Rates can rise even if you don’t borrow more.
• Using a HELOC for everyday spending. It is secured by your home, so missed payments put the home at risk.
• Forgetting fees. Annual fees, early-closure fees and appraisal costs add to the cost of borrowing.
• Letting an unused line lapse unnoticed. Some lenders charge inactivity fees or close lines that aren’t used. If you keep a HELOC as a safety net, check the terms each year.

Frequently asked questions

How do I calculate interest on a line of credit?

Multiply the balance you've drawn by the annual rate and divide by 365 for the daily interest, then add up each day's interest for the billing period. A $25,000 balance at 8.5% accrues about $5.82 a day, roughly $177 a month.

Why does my HELOC rate change?

Most HELOCs have a variable rate equal to an index, usually the prime rate, plus a fixed margin. When the prime rate moves, your rate and payment move with it, usually from the next billing cycle.

Is HELOC interest tax deductible?

Under current US rules, HELOC interest is generally deductible only if you itemize and the money was used to buy, build or substantially improve the home that secures the loan, within overall mortgage debt limits. Check IRS Publication 936 for the current rules.

What happens at the end of the draw period?

You can no longer borrow, and payments switch from interest-only (or a small minimum) to principal plus interest over the repayment period. The jump can be large, especially if rates have risen.