Interest Expense Formula

Interest Expense Formula (Table of Contents)

Interest Expense Formula
Examples of Interest Expense Formula (With Excel Template)
Interest Expense Formula Calculator

Interest Expense is one of the primary components of Income Statement, where it is treated as an ‘Expense’ and is directly related to the Current Debt Position of the Business.

The formula of the Interest Expense can be explained as:

Interest Expense = Principal Amount (Total Borrowed Amount) * Rate of Interest * Time Period

In other words, the Interest expense could be explained as

Interest Expense = Average Balance of Debt Obligation * Interest Rate * Time period

Examples of Interest Expense Formula (With Excel Template)

Let’s take an example to understand the calculation of Interest Expense formula in a better manner.

You can download this Interest Expense Formula Excel Template here – Interest Expense Formula Excel Template

Interest Expense Formula – Example #1

ABC Ltd. took a Loan of INR 1,00,000 on 1^st January with a simple interest rate of 8.5% per annum. On 31^st December ABC Ltd. has paid the Principle loan Amount along with the Interest expense.

Solution:

Interest Expense is calculated using the formula given below

Interest Expense = Principal Amount (Total Borrowed Amount) * Rate of Interest * Time Period

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Interest Expense = INR 1,00,000 * 8.5% * 1
Interest Expense = INR 8,500

Total amount paid for Interest is INR 8,500

Thus, the amount paid by ABC ltd at the end of the year = INR (8,500 + 1,00,000) = INR 1,08,500

Interest Expense Formula – Example #2

Gati Ltd. has long term Loan of INR 216 Cr on 31^st March with a simple interest rate of 8.5% per annum and a Short-term loan of INR 105 Cr during that time period with a rate of interest of 10% per annum. Both were taken a year ago. Calculate the Interest expense on 31^st March.

Solution:

Interest Expense for long term loan is calculated using the formula given below

Interest Expense = Principal Amount (Total Borrowed Amount) * Rate of Interest * Time Period

Interest Expense (Long Term) = INR 216 Cr * 8.5% * 1
Interest Expense (Long Term) = INR 18.36 Cr

Interest Expense for short term loan is calculated using the formula given below

Interest Expense = Principal Amount (Total Borrowed Amount) * Rate of Interest * Time Period

Interest Expense (Short Term) = INR 105 Cr * 10% * 1
Interest Expense (Short Term) = INR 10.5 Cr

Total amount paid for Interest = INR (18.36+ 10.5) = INR 28.86 Cr.

Interest Expense Formula – Example #3

Tata Motors Ltd had total Borrowings (including Long-term and Short-term borrowings) of INR 88,950 Cr on 31^st March 2018. On 1^st October the Company has increased its total Borrowings to INR 92,923 Cr. Calculate the total amount of Interest the Company has to pay at the end of March 31^st 2019 if the rate of interest stands @ 5.25% / annum.

Solution:

Loan taken by Tata Motors Ltd. on one year ago = INR 88,950 Cr.
The rate of Interest per annum = 5.25%
Tenure = 365 Days (One Year)

Interest Expense is calculated using the formula given below

Interest Expense = Principal Amount (Total Borrowed Amount) * Rate of Interest * Time Period

Interest Expense = INR 88,950 Cr * 5.25% * 1
Interest Expense = INR 4,669.88 Cr

Again, Loan taken by Tata Motors Ltd. for last six month = INR (92,923 – 88,950) Cr = INR 3,973 Cr

Loan = INR 3,973 Cr
The rate of Interest per annum = 5.25%
Tenure = 180 Days (Half Year)

Interest Expense is calculated using the formula given below

Interest Expense = Principal Amount (Total Borrowed Amount) * Rate of Interest * Time Period

Interest Expense = INR 3,973 Cr * 5.25 % * 1/2
Interest Expense = INR 104.29 Cr

Total amount paid for Interest = INR (4,669.88 + 104.29) Cr =INR 4,774.17 cr.

Explanation of the Interest Expense Formula

Interest expense is the cost at which the Lender gives money to the required party. Business houses need capital to do business. Capital can be of two types – one is Equity and another is Debt. Equity holders are the real owners who are entitled to take risk of the business and their return is not Fixed. On the other hand, the Debenture holders are willing to invest in the business but with an assurance of guaranteed return. Debenture holders’ charges fixed rate of interest and the Business is liable to pay irrespective of loss or profit of the Business. The same phenomenon happens with the Financial Institutions or the banks when they lend money to the business.

Relevance and Uses of Interest Expense Formula

Interest Expense formula is extensively used by the Companies, Firms, Government, Banks and Financial institutions as it is revenue of lender and an expense for the Borrower. Details of Interest calculations is always required as it might affect their Business negatively or positively depending upon the rate of interest and tenure of the loan.
Due to higher Borrowings, some companies might find hard to see profitability due to higher expenses and there is the sinking of margins with profitability. Thus, the management might talk for a revised rate of interest so as to save their ‘bottom-line’. Again, during swift payment of interest, the borrowers might give a certain rebate in interest rate which actually helps borrowers to pay interest before the time. The rate of interests also depends on the Central banks interest rate changes. During high inflation, the government hikes interest costs for the banks so that the excess liquidity would get arrested and would result in lower inflation and vice versa.
Thus, Interest costs have played a vital role for both the Lender and the borrower. For borrower’s point of view, higher the interest costs lower the profit as it tends to lower the Company’s Net profit margin. Higher interest costs are always healthy for Lenders as it tends to generate income from the existing Funds landed.