Cost of Debt Calculator
Effective borrowing cost after tax.
Calculate pre-tax and after-tax cost of debt from annual interest expense, total debt, and tax rate. Free and educational.
What this tool does
This calculator estimates both the pre-tax and after-tax cost of debt for a business. It takes your annual interest expense, total debt outstanding, and corporate tax rate to show how much you're effectively paying to borrow. The pre-tax cost of debt expresses interest expense as a percentage of total debt, while the after-tax version adjusts for the tax deductibility of interest payments. This matters because interest payments typically reduce taxable income, lowering the real economic cost of borrowing. The result illustrates how tax rates influence effective borrowing costs across different capital structures. Note that this calculation assumes a standard tax treatment of interest and doesn't account for other financing costs, debt covenants, or changing interest rates over time. The output is for financial modeling and comparison purposes.
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Formula Used
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Disclaimer
Results are estimates for educational purposes only. They do not constitute financial advice. Consult a qualified professional before making financial decisions.
Cost of debt is the effective interest rate a business pays on its borrowings, adjusted for the tax deductibility of interest. Divide annual interest expense by total debt for pre-tax cost. Multiply by (1 - tax rate) for after-tax cost. The after-tax number is what matters for WACC and capital allocation decisions because interest is tax-deductible in most jurisdictions.
210k annual interest on 3M debt = 7% pre-tax cost. At 21% corporate tax rate, the tax shield saves 44,100 per year. After-tax cost of debt is 7% × (1 - 21%) = 5.53%. That's the real cost the business carries on its borrowings after accounting for tax deductibility.
This tax shield is why moderate debt lowers the cost of capital. A business with 30% debt at 5.5% after-tax cost and 70% equity at 12% cost of equity has WACC of 10.05%. All-equity, the WACC equals 12%. Debt, used moderately, measurably lowers the hurdle rate for new investments.
A worked example
Try the defaults: annual interest expense of 210,000, total debt of 3,000,000, tax rate of 21%. The tool returns 5.53%. You can adjust any input and the result updates as you type — no submit button, no reload. That's the real power here: seeing how sensitive the output is to one or two assumptions.
What moves the number most
The result responds to Annual Interest Expense, Total Debt, and Tax Rate %.
The formula behind this
Pre-tax cost = interest ÷ debt × 100. After-tax cost = pre-tax × (1 - tax rate). Everything the calculator does is shown in the formula box below, so you can check the math against your own spreadsheet if you want.
What to do with a low result
A disappointing result is information, not a judgement. Pick the single input that dragged the figure down most and focus the next quarter on that one factor. Breadth-first improvement rarely works; depth-first on the worst input usually does.
What this doesn't capture
The score is a composite of the inputs you provide. Life context — job security, family obligations, health, housing — doesn't appear in the math but shapes the real picture. Use the number as a prompt, not a verdict.
££210,000 interest ÷ ££3,000,000 debt × (1 - 21%) = 5.53%.
Inputs
This example uses typical values for illustration. Adjust the inputs above to match a specific situation and see how the result changes.
Sources & Methodology
Methodology
This calculator computes the after-tax cost of debt by dividing annual interest expense by total debt outstanding to determine the pre-tax borrowing rate, then applies a tax adjustment factor. The model assumes the organisation can fully utilise interest tax deductions in the current period, and that the tax rate remains constant across the calculation period. The after-tax cost reflects the effective borrowing expense after accounting for the tax shield benefit of deductible interest payments. The calculator does not model changes in debt levels over time, varying interest rates, default risk, or the timing of tax deductions. Results represent a snapshot cost based on current inputs and should not be treated as a forecast of future borrowing costs or tax outcomes.
Frequently Asked Questions
Why use after-tax cost?
Which tax rate to use?
Is lower cost of debt always better?
Does this include loan fees?
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