Loan Payments: Calculating The Monthly Repayments And Costs
Understanding your loan isn’t as simple as knowing how much money you’re borrowing. There are various fees, penalties, interest, and other costs associated with it that make up the true number of what you’ll be responsible for repaying in the end.
Knowing how to calculate loan payments is crucial to making an informed and smart decision about your financing options. Understanding how lending products and interest rates work will help you to identify the best offer from lenders and give you the tools you need to budget and make those monthly payments on time.
Keep reading to learn how to accurately calculate monthly repayments.
How Do Loans Accrue Interest?
It’s no secret that lending products go hand in hand with interest. However, what does that mean exactly? This rate is a driving factor in determining what sum you’ll pay throughout the lifetime of your loan. Moreover, it’s an amount of money you pay for the opportunity of borrowing funds. In other words, it’s how the lender remains profitable.
When researching the different types of lending products available to you, you may stumble across interest-only loans. This is a type of borrowing where you’re only responsible for paying for its interest for a specified amount of time. It’s easy to calculate how much you'll owe each month.
For example, assume the total amount borrowed is $20,000 with a term of 10 years and an APR of 6%. To calculate your repayments, you would need to take the amount of money you borrowed and multiply that by your rate. In this case, that would be $20,000 x .06. The remaining sum, $1,200, is what you’d owe in interest. Now divide that $1,200 by 12. You’ll discover that your monthly interest payment is $100.
Interest-only financing remains as such for the amount of time specified in the contract. You’ll eventually need to begin paying back your principal in addition to interest.
This financing option requires you to make scheduled payments. These repayments are applied to both the interest and principal amount on your loan.
Using the same example as above, you can easily understand how this lending product is calculated. If you have 6% APR on your loan, divided by 12 payments (12 months in a year), then you get .005. Multiply that by the total amount borrowed (.005 x $20,000). This reveals that the first month’s interest payment is $100. However, that number is subject to change since you’ll owe a lesser amount each month. To calculate the next month, simply adjust the total sum that’s due.
Read more about: How Does An Amortized Loan Work?
Credit Card Loans
Credit cards are another option to gain access to the funds you need. When you apply for a new card, many companies will offer an introductory period that features 0% APR. This period will usually last 12 to 24 months.
If you know your amount can be paid off in that period, then this is a wonderful opportunity to finance a purchase without having to pay interest.
Keep in mind that once the introductory period ends, you’ll be responsible for interest, often at a very high variable rate.
For a better understanding, consider the following example. If you find yourself owing $8,000 on your card and have a minimum payment of 1% of your balance, you’ll need to multiply $8,000 by 0.01. This reveals that your monthly repayment is $80. Although, this doesn’t include associated fees. Hence, you’ll want to make sure to read the fine print carefully when opting for this option.
Additional Costs To Consider
It’s rare to find a lending product that comes with virtually no fees. When you’re receiving offers from lenders, carefully look for and compare hidden costs and fees. This is the only way to truly understand the true cost of financing.
Additional costs to consider might include lifetime interest, fees, processing charges, early repayment fees, and more.
Ways To Save Money On Loan Repayments
As the borrower, you can make smart financial decisions to empower yourself and secure the right financing for your needs. Understanding interest can help you identify the right lending product and ensure that no surprises are in store. Consider the following methods to save money:
- It never hurts to get ahead and make extra payments on the principal. This reduces your outstanding balance and thus your interest. Just watch out for prepayment penalties
- Shop around and get offers from a variety of reputable lenders
- Once you’re armed with several offers, be sure to carefully look over the lending product specifics like rates and fees
Knowing how to calculate loan repayments is crucial for making a smart financial decision. Your outstanding balance is never just the principal amount. After considering the interest, fees, and penalties, you’ll be able to budget and make monthly payments on time with ease.