Business Line of Credit Interest Calculation Methods: 360 vs 365 Day
The method your lender uses to calculate interest can meaningfully impact your borrowing costs. This guide explains 360-day vs. 365-day calculations, daily balance methods, and how to compare lenders accurately.
Why Interest Calculation Method Matters
Different calculation methods can result in meaningful variance in actual interest paid:
| Calculation Method | $100,000 at 10% for 1 Year |
|---|---|
| 365/365 | $10,000.00 |
| 360/365 | $10,138.89 |
| 30/360 | $10,000.00 |
The difference: ~1.4% more with 360-day method ($138.89 per $100,000 per year)
Day Count Conventions Explained
1. Actual/365 (365/365)
Most common for business lines of credit:
Daily Interest = Principal × (Rate ÷ 365)
Annual Interest = Daily Interest × Days in Year
Example:
- Principal: $100,000
- Rate: 10%
- Daily Interest: $100,000 × (0.10 ÷ 365) = $27.40
- Annual Interest (365 days): $27.40 × 365 = $10,000
2. Actual/360 (360/365)
Often used by commercial banks:
Daily Interest = Principal × (Rate ÷ 360)
Annual Interest = Daily Interest × 365 (or actual days)
Example:
- Principal: $100,000
- Rate: 10%
- Daily Interest: $100,000 × (0.10 ÷ 360) = $27.78
- Annual Interest (365 days): $27.78 × 365 = $10,138.89
Result: You pay $138.89 more annually - effectively 10.14% instead of 10%
3. 30/360 (Bond Basis)
Treats all months as 30 days:
Monthly Interest = Principal × (Rate ÷ 12)
Example:
- Principal: $100,000
- Rate: 10%
- Monthly Interest: $100,000 × (0.10 ÷ 12) = $833.33
- Annual Interest: $833.33 × 12 = $10,000
Effective Rate Comparison
Nominal 10% Rate, Different Methods
| Day Count | Daily Rate | Effective Annual Rate | Annual Interest on $100K |
|---|---|---|---|
| Actual/365 | 0.02740% | 10.00% | $10,000 |
| Actual/360 | 0.02778% | 10.14% | $10,139 |
| 30/360 | 0.02740% | 10.00% | $10,000 |
At Higher Balances
| Balance | 365-Day Interest | 360-Day Interest | Difference |
|---|---|---|---|
| $100,000 | $10,000 | $10,139 | $139 |
| $250,000 | $25,000 | $25,347 | $347 |
| $500,000 | $50,000 | $50,694 | $694 |
| $1,000,000 | $100,000 | $101,389 | $1,389 |
Balance Calculation Methods
1. Average Daily Balance
Most common for revolving lines:
Average Daily Balance = Sum of Daily Balances ÷ Days in Period
Interest = Average Daily Balance × (Rate ÷ 365) × Days
Example:
- Day 1-10: $50,000 balance
- Day 11-20: $75,000 balance
- Day 21-30: $25,000 balance
Calculation:
- Sum of balances: ($50,000 × 10) + ($75,000 × 10) + ($25,000 × 10) = $1,500,000
- Average Daily Balance: $1,500,000 ÷ 30 = $50,000
- Interest at 10%: $50,000 × (0.10 ÷ 365) × 30 = $411
2. Daily Balance Method
Interest calculated on each day’s actual balance:
Daily Interest = Balance × (Rate ÷ Days in Year)
Monthly Interest = Sum of Daily Interests
3. Beginning-of-Month Balance
Less common, calculates on month-start balance:
Monthly Interest = Opening Balance × (Rate ÷ 12)
Warning: This method penalizes early-month paydowns.
Leap Year Impact
Actual/365 Method
In leap years (366 days), you pay one extra day of interest:
| Year | Days | Interest on $100K at 10% |
|---|---|---|
| Regular | 365 | $10,000 |
| Leap | 366 | $10,027 |
Actual/360 Method
Leap year means two extra days of interest:
| Year | Days | Interest on $100K at 10% |
|---|---|---|
| Regular | 365 | $10,139 |
| Leap | 366 | $10,167 |
Payment Timing Impact
When Interest Is Charged
| Timing | Interest Calculation | Impact |
|---|---|---|
| Beginning of month | On upcoming month’s balance | Pay interest in advance |
| End of month | On actual usage | Pay for what you used |
| On payment date | On days since last payment | Accurate to transaction |
Early Payment Example
$100,000 balance, 10% rate, paid off on day 15:
| Method | Calculation | Interest |
|---|---|---|
| Daily Balance | $100,000 × (0.10 ÷ 365) × 15 | $41.10 |
| Monthly (prorated) | $833.33 × (15 ÷ 30) | $416.67 |
Difference: Paying daily balance saves $375.57
How to Compare Lenders
Step 1: Ask About Day Count
“What day count convention do you use - 360 or 365?”
Step 2: Check Balance Method
“Is interest calculated on average daily balance or another method?”
Step 3: Calculate Effective Rate
Convert any 360-day method to equivalent 365-day rate:
Effective Rate = Stated Rate × (365 ÷ 360)
Example:
- Stated Rate (360-day): 10%
- Effective Rate: 10% × (365 ÷ 360) = 10.14%
Step 4: Compare True Costs
| Lender | Stated Rate | Day Count | Effective Rate |
|---|---|---|---|
| Bank A | 10.00% | 360 | 10.14% |
| Bank B | 10.10% | 365 | 10.10% |
| Better Deal | Bank B |
Hidden Costs in Calculation Methods
1. Compounding Frequency
| Compounding | Effective Rate (10% nominal) |
|---|---|
| Annual | 10.00% |
| Monthly | 10.47% |
| Daily | 10.52% |
2. Interest on Interest
Some lenders capitalize unpaid interest:
- Unpaid interest added to principal
- Future interest charged on larger balance
- Can increase effective rate significantly
3. Minimum Interest Charges
| Lender | Minimum Monthly Interest | Impact on Small Balances |
|---|---|---|
| A | $0 | None |
| B | $25 | $10K balance = 3% effective rate |
| C | $50 | $10K balance = 6% effective rate |
Real-World Example
Scenario: $200,000 Average Balance, 12% Stated Rate
| Factor | Bank A | Bank B |
|---|---|---|
| Day Count | 360 | 365 |
| Balance Method | Average Daily | Average Daily |
| Compounding | Monthly | Monthly |
| Effective Rate | 12.17% | 12.00% |
| Annual Interest | $24,335 | $24,000 |
| Savings with Bank B | - | $335/year |
Questions to Ask Lenders
- What day count convention do you use (360 or 365)?
- How is the daily balance calculated?
- When is interest capitalized (if at all)?
- Is there a minimum monthly interest charge?
- How does early repayment affect interest calculation?
- Do you charge interest on accrued interest?