When considering taking out a personal loan, it is crucial to know how much the loan payments and costs will be and whether your budget can cover the extra expense. It can be tough to figure out the exact installment payments beforehand. Therefore, it is important to do your research and plan.
Borrowing money from a lender always comes with additional costs in the form of interest. Your monthly installment payments will be higher than just repaying the principal. Different lenders use different methods to calculate interest, so your monthly payments may vary depending on who you borrow from. Here are some common ways that lenders calculate monthly interest payments.
What Are personal loans? How Do they work?
When you take out a personal loan, you will be responsible for the loan payments and costs, interest and fees associated with the loan. You can itemize these costs by:
- Principal: The amount you borrow that gets deposited into your account.
- Interest: The amount of money the lender charges you to give you a loan. Your annual percentage rate includes the interest rate and other upfront costs, such as origination fees. With most personal loans, you have a fixed interest rate, meaning that your monthly payments will not fluctuate over the life of the loan. Interest rates are based on your credit score and history–the higher your credit score, the lower your interest rate is likely to be.
- Fees: There are several extra costs associated with taking out a loan, such as origination fees, late fees, and insufficient funds fees.
The amount you pay each month is determined by how much you owe and the length of time you have to repay it. A $5,000 loan spread out over five years will have smaller monthly payments than a $5,000 loan paid back over three years because the payments are spread out over a longer period. However, keep in mind that with a longer loan term, you will pay more interest and fees.
The formula for loan payments
Loan payments are calculated using your loan principal, interest rate, and loan term. Your principal is divided equally over your repayment term and interest charges due during that time. Although terms can vary, you will usually make 12 payments per year.
Different types of loans have different corresponding calculators to estimate your payments. For example, interest-only loans and amortizing loans (which include principal and interest) each have their unique calculator.
Loans with only interest
When you take out an interest-only loan, you’ll only be responsible for paying the interest on the loan for a set time. Your principal balance will stay the same during that time. Calculating your monthly loan costs is relatively simple.
Assuming you have a $20,000 loan with a 6 percent APR and a 10-year repayment term, here’s an estimate of your costs. First, multiply the borrowed amount by the interest rate to get your annual interest costs. This figure can be divided by 12 months to give you a monthly estimate:
- $20,000 x 0.06 = $1,200 in interest each year
- $1,200 divided by 12 months = $100 in interest per month
Several types of loans are available to consumers, and each has its set terms. An interest-only loan is where the borrower only pays the interest for a certain time. After this interest-only period ends, the borrower must start repaying the principal amount borrowed and any accumulated interest.
Amortizing loans allows you to pay off your loan balance over time. Each month, a portion of your payment goes toward the principal balance, and the rest goes toward interest.
Different types of loans have different terms and conditions. Some loans, like auto loans, are amortizing loans. This means that the loan is paid back in installments over time. Let’s say you took out an auto loan for $20,000 with an APR of 6 percent and a five-year repayment timeline.
- Divide the interest rate you’re being charged by the number of payments you’ll make each year, usually 12 months.
- Multiply that figure by the initial balance of your loan, which should start at the full amount you borrowed.
For the figures above, the loan payment formula would look like this:
- 0.06 divided by 12 = 0.005
- 0.005 x $20,000 = $100
The interest on your loan is $100 for the first month. This amount decreases each subsequent month as you pay off more of the loan principal. You can calculate the monthly interest payment by using the same equation with your new, lower loan balance.
Calculating monthly loan payments with a calculator
There are many types of loans, each with its requirements. Student loans, for example, are calculated differently than auto or personal loans. Here is how to use loan calculators based on your loan type.
An online calculator for personal loans
Personal loan calculators can help you see how much your monthly payments would be, based on the principal balance, interest rate, and repayment term length. This can help see whether or not you can afford the loan.
Most simple personal loans will work with this calculator, but it’s important to understand how they work before you borrow. This loan payment calculator can give you a better idea of what to expect, but you may want to use a more detailed calculator for more specific calculations.
Calculator for student loans
There are a lot of factors to consider when it comes to student loan repayment, but a student loan calculator can help you figure out the details.
This calculator can help you determine your monthly student loan payment and the total repayment amount with different loan terms. A one-time extra payment or extra monthly/yearly payments can also be included to see how it would impact your total loan repayment.
Calculator for mortgages
Calculating your mortgage payments is important to determine your monthly installments. The mortgage calculator considers your loan amount, interest rate, and the number of payments over the life of the loan. This information is important to make informed decisions about your finances.
Using this calculator or crunching the numbers using this formula can help determine how much of a house you can afford. Working through these calculations can also help determine whether you need a bigger down payment for your home purchase to help reduce the monthly payment amount.
Calculator for home equity lines of credit
A HELOC can be a great way to access extra cash when you need it. But how much will your monthly payments be? It depends on how much you borrow from your revolving line of credit. Some calculators can give you an estimate of your monthly payment based on how much debt you want to pay off and in what timeframe.
HELOC payoff calculators can be a helpful tool in planning your repayment timeline and monthly payments. To use the calculator, you will need to know your current HELOC balance, interest rate (APR), and any additional charges or annual fees. The calculator will then provide you with a specific repayment timeline and the amount you would need to pay each month to meet that timeline.
Calculator for home equity loans
Before taking out a home equity loan, it’s important to calculate how much you can afford to borrow. A home equity loan calculator can give you a good idea of what your monthly payments might be and how much you can borrow.
To determine how much you can borrow through a home equity loan, lenders will consider your credit score along with the estimated value of your home and your outstanding mortgage balance. Although your available home equity is a primary factor in the loan amount, having a good credit score can help you secure a lower interest rate.
Auto loan calculator
You don’t have to take out a car loan at the dealership without knowing your monthly payments. You can use an auto loan calculator to better understand what you can afford. This calculator will ask for your desired loan amount, repayment term and interest rate, and whether you want a new or used car. Auto loans may have shorter terms than personal or home equity loans, so you can compare how different terms affect your monthly payment.
Interest-saving tips for loans
A loan can be expensive, especially when you factor in the interest cost. However, you may be able to save money on your loan over time by keeping your interest rates low. Some strategies that could help lower your rates include.
- Prequalify yourself. You don’t need to go through the whole loan application process to find out how much you qualify for. This way, you can compare rates from different lenders without risking getting denied. Once you shop around, choose the lender with the best interest rate, least fees, and favorable repayment terms.
- Make extra payments toward the principal of your loan. You’ll have one loan payment each month. Some of that will go to your principal, and the rest will be interest. Whenever you can, make an extra payment toward your principal. This will reduce the total amount you owe and the interest you have to pay. The sooner you do this, the better off you’ll be since interest is charged upfront on amortizing loans.
- Your loan should be paid off early. Making higher monthly payments on your loan or paying off the remaining balance in a lump sum can save you money on interest over the life of the loan. Be sure to check for any prepayment penalties before taking this route.
- Consider a credit card with a 0% introductory APR. Credit cards with 0% APR introductory offers can be extremely helpful when you need to make a large purchase and don’t want to incur interest charges. However, it’s important to remember that these offers typically only last for a limited time – usually between 12 and 18 months. Once the introductory period is over, any remaining balance will start accruing interest at the normal rate, which is often much higher than the 0% APR.
- Be careful not to overborrow. The amount of interest you pay on loan can be reduced by borrowing less money. Borrowing only the amount needed to cover the costs you are hoping to pay with the loan will save you money in interest payments. Carefully consider all options and crunch the numbers before deciding on how much to borrow.
Before signing on the dotted line for a loan, it’s important to understand your monthly repayment responsibilities. This will include not just the borrowed amount but also interest and any fees associated with the loan. By knowing what you’ll need to pay each month, you can make sure you’re comfortable with the loan agreement and avoid any nasty surprises down the road.
When you are ready to apply for a loan, use an online loan payment calculator to estimate your monthly payments. Remember that you can save money on your loan by borrowing only what you need and making extra payments when possible.