When taking a loan, the monthly payments and the total amount you will pay back are essential factors to consider. You need to evaluate whether you can afford the monthly payments when your monthly income and expenses are taken into account. Personal loan calculators will help you quickly get the answers you need regarding the affordability of your loan. In essence, a personal loan calculator will help you understand your loan better and know how the loan affects your finances.
What Calculator Should You Use?
Different loans have different calculation formulas. It, therefore, becomes essential to know the kind of loan you are dealing with before using a personal loan calculator. Once you get the formula of your loan calculation, you can do the math and find out the cost of your loan. If math is not your friend, you can feed the formula into a spreadsheet such as Microsoft Excel or Google Sheets. If that still is a difficult task, you can find an online personal loan calculator. With the online calculators, you will just need to fill in your values, click the “calculate button,” and read the results. Below are the most common personal loans calculations.
Amortizing Loan Calculations
Monthly payment = amount borrowed (A) / discount factor (D)
where:
Discount Factor (D) = {[(1 + i) ^n] – 1} / [i(1 + i)^n]
n stands for the number of periodic payments. This is the total number of payments to be made per year multiplied by the number of years for which the loan will run. For example, if the loan will be repaid monthly for 20 years, n will be 20 times 12 which is 240.
i stands for periodic interest rate. It is calculated by dividing the annual interest rate by the number of payment periods. For example, if the personal loan’s annual interest rate is 6% percent, which is to be repaid monthly, then:
i= 0.06/12 = 0.005
Most personal loans fall under amortizing loans. Some other types of personal loans are credit card or interest-only loans.
Interest-only Loan Calculations
The monthly repayment calculation for interest only personal loans is straightforward.
Monthly payment = (amount borrowed * annual interest rate) / number of payments per year
Credit Card Loan Calculations
Credit card lenders have a formula for determining the minimum monthly payment the borrower should pay. For example, the borrower might be required to pay a certain percentage of the outstanding balance every month.
Understanding Your Personal Loan Calculations
So far, we have covered monthly payment calculations. Besides monthly payments, there are other factors you should consider when evaluating a loan offer. They include:
The total interest paid: You should calculate and consider the total interest you will pay over the life of the loan. Usually, the more extended the repayment period, the more the interest.
The estimated annual percentage rate (APR): APR is a valuable tool for calculating the cost of personal loans. The APR takes into account the annual interest rate in addition to up-front fees. When determining the APR, lenders consider the borrower’s debt-to-income ratio and credit score. Though APR is a useful tool for comparing loan offers, it should be considered along with other indicators such as the total cost of the loan.
Total cost: This is the total amount you have to pay. It takes into account the principal, fees, and interest paid over the repayment period of the loan. It is one of the best factors to consider when evaluating loan offers from different lenders.
Use Your Personal Loan Calculations to Find the Best Deal
Lenders have different loan terms. It is, therefore, necessary to evaluate offers from different lenders. Lender A might offer more affordable monthly payments compared to lender B. However, the total cost of the loan from lender A might be considerably higher than loan B. When evaluating loan offers, ensure the monthly payments fit your budget. Furthermore, consider the total cost of the loan and negotiate for a lower figure.
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