Line Of Credit Calculator — Draw, Repay & Interest

Managing a line of credit effectively requires understanding how your draws, interest rates, and repayment strategies impact your bottom line. Our Line of Credit Calculator is designed to help you visualize your repayment journey, estimate total interest costs, and create a plan to become debt-free faster.

Unlike a traditional term loan where you receive a lump sum and pay it back in fixed installments, a line of credit (LOC) offers flexibility that can be both a powerful financial tool and a potential debt trap. Whether you have a Personal Line of Credit (PLOC), a Home Equity Line of Credit (HELOC), or a Business Line of Credit, the mechanics of interest calculation and repayment are similar. This calculator helps you navigate the "draw" and "repayment" phases, showing you exactly how much your borrowing costs and how long it will take to pay off your balance based on different payment strategies.

How to Use the Line of Credit Calculator

This tool is built to be intuitive while providing deep insights into your debt repayment. Here is a step-by-step guide to getting the most accurate results:

1. Enter Your Current Balance: Input the total amount you have currently drawn from your line of credit. This is the principal amount you owe today.
2. Input the Annual Interest Rate (APR): Check your latest statement for your current APR. Remember, lines of credit often have variable rates, so it's wise to run scenarios with slightly higher rates to see how future increases might affect your payments.
3. Select a Repayment Strategy:
   • Minimum Payment %: Choose this to see the "slow and steady" (and often most expensive) path. Most banks require a minimum payment of 2% to 5% of the outstanding balance.
   • Fixed Monthly Payment: Use this to test how much faster you can pay off the debt by committing to a specific monthly amount (e.g., $500/month).
   • Payoff in Months: Select this if you have a target date in mind (e.g., "I want to be debt-free in 24 months") to calculate the monthly payment required to hit that goal.

Understanding Line of Credit: Draw vs. Repayment Periods

One of the most confusing aspects of lines of credit, particularly HELOCs, is the difference between the Draw Period and the Repayment Period. Understanding these phases is crucial for long-term financial planning.

The Draw Period

The draw period is the window of time during which you can actively borrow money from your credit line. For HELOCs, this is typically 5 to 10 years. For personal lines of credit, it might be ongoing as long as the account is in good standing.

• Access to Funds: You can borrow, repay, and borrow again up to your credit limit.
• Minimum Payments: Often, lenders only require "interest-only" payments during this phase, or very low minimum payments (e.g., 1-2% of the balance). You can use our Interest Only Loan Calculator to see how these payments work in isolation.
• Risk: Because payments are low, it's easy to accumulate a large balance without significantly reducing the principal.

The Repayment Period

Once the draw period ends, the line of credit enters the repayment period. You can no longer borrow funds, and the loan effectively converts into a traditional installment loan.

• Principal + Interest: You must pay back both the principal and interest.
• Payment Shock: If you were making interest-only payments during the draw period, your monthly obligation could double or triple overnight when the repayment period begins.
• Fixed Term: You typically have a set number of years (e.g., 10, 15, or 20 years) to pay off the remaining balance in full.

How Interest is Calculated on a Line of Credit

Interest on a line of credit is usually calculated using a simple interest formula based on the average daily balance. This is different from a mortgage, which is amortized over a long term, or a credit card, which may have a grace period.

The basic formula for daily interest is:

This daily interest is then summed up for the number of days in your billing cycle (usually 30 or 31 days). Because interest accrues daily, making payments earlier in the billing cycle can actually save you money compared to paying on the due date.

Variable Rates vs. Fixed Rates

Most lines of credit have variable interest rates, often tied to the "Prime Rate." This means your interest rate—and your required payment—can change.

• When the Fed raises rates: Your LOC interest rate goes up, increasing your cost of borrowing.
• When the Fed cuts rates: Your rate may go down, potentially lowering your interest costs.

Some lenders offer a "fixed-rate option" for a portion of your balance. If you are concerned about rising rates, ask your lender if you can lock in a fixed rate for a specific draw amount.

Strategies to Pay Off Your Line of Credit Faster

Getting out of debt requires a plan. Here are three proven strategies to clear your line of credit balance faster and save money on interest.

1. The Fixed Payment Method

As demonstrated by our calculator, paying a fixed dollar amount every month is far superior to paying the minimum percentage.

• Scenario: You owe $10,000 at 9%.
• Minimum Payment (2%): Your first payment is $200, but it drops every month. It could take over 15 years to pay off.
• Fixed Payment ($300): You pay $300 every single month. You pay off the debt in roughly 3.5 years and save thousands in interest.

2. The Velocity Banking Method (Advanced)

Some borrowers use a strategy called "Velocity Banking," where they use a line of credit as their primary checking account. They deposit their entire paycheck into the LOC to minimize the daily average balance (reducing interest) and then pay bills out of the LOC as needed.

Warning: This strategy requires strict discipline. If you spend more than you earn, you will simply increase your debt. It works best for those with positive cash flow who can float expenses on the line of credit.

3. The Debt Avalanche

If you have multiple debts, compare the interest rate of your line of credit to your other loans.

• If your LOC rate is higher than your car loan or mortgage, prioritize paying extra on the LOC.
• If your LOC rate is lower than your credit cards, pay the minimum on the LOC and attack the credit cards first.

Use our Debt Avalanche Calculator to see the optimal order for paying off multiple debts.

Conclusion

A line of credit is a versatile financial tool, but it requires active management to prevent it from becoming a long-term burden. By understanding the mechanics of daily interest and committing to a repayment strategy that exceeds the minimum requirements, you can save significant money and become debt-free sooner.

Use this calculator regularly to track your progress. Whenever you have extra funds, consider making a principal-only payment to lower your daily balance and reduce future interest costs. For more tools to manage your finances, explore our Loans & Debt category.