Loan Amount: How to Calculate Payments and Costs

Did you know that 1 out of every 5 millennials believe that they’ll die before they ever pay off their debt?

Taking on debt is something that you should do only after careful consideration. Loans can often help with debt. However, if you take out a loan and don’t calculate how long it’ll take to pay it off, you could end up adding more debt on top of the pile.

Are you unsure if the final loan amount is worth it after you pay the interest and other fees? Keep reading to learn all about how to calculate payments and costs.

The Importance of Calculating Before Signing

Can you believe that America is ranked 31st in math literacy out of almost 80 other countries? This is a major concern when it comes to making informed decisions in life. If someone isn’t able to calculate loan interest rates, for instance, then it’s easy for a provider to take advantage of that.

Calculating a tip after eating at a restaurant is one thing, but figuring out long-term loan payments can sometimes end up being much more difficult. Once you figure out how to do it, you can decide if a loan is worth taking out or not. You can also determine your payment costs each month and start budgeting for that ahead of time.

Of course, there’s no one-size-fits-all calculation for monthly loan payments and other factors. The exact math involved will depend on the type of loan you’re taking out. Before you sign on the dotted line, you should complete each calculation so that your decision is as informed as possible.

The Anatomy of a Loan

Before getting into the various loan types out there, it’s worth breaking down loan payments into smaller parts. The principal part of a loan refers to the exact amount you borrowed and received from the lender. Aside from paying back the principal, you’re also responsible for the interest.

Put in the simplest terms possible, interest is what the lender charges you for taking the principal amount. This rate will often take the form of an annual percentage rate (APR). The APR takes into account not only the interest rate but also upfront costs you may be required to pay, such as an origination fee.

While it depends on the loan, there’s a high likelihood that the type of interest rate your loan will come with is one that’s fixed. This means the rate will stay the same from month to month instead of fluctuating based on various factors. This makes it much easier to use a personal loan calculator and plan for the future.

Aside from the principal and the interest on a loan, there are also various fees to consider. The origination fee mentioned above refers to the cost of processing a loan application and executing the payment. There’s also the potential for insufficient funds fees and late fees, among others.

Although no one plans on missing a payment deadline, life can end up being unpredictable. This is why it’s a good idea to ask how much the late fees are and if they’re also subject to interest. Keep in mind that the longer your payment plan extends, the lower the interest tends to be, but this isn’t a guarantee.

Having all of this information will go a long way toward helping you decide on the best course of action.

Calculating Amortizing Loans

Whether you’re getting a car loan or a mortgage, chances are the loan is an amortizing one. Most personal loans have this structure because it allows for the most effective payment allocation. If you’ve never heard of it before, then it’s enough to know that amortizing loans ensures your payments go toward reducing the interest accumulation.

Once you’ve handled the interest, then the rest is applied to the principal amount. If your interest is too high for you to pay it off in a given month, then your payment will end up being divided between the interest and the principal. Over time, more and more of your payments will go toward the principal payment because you’ll have already taken care of the interest.

Are you wondering why it’s important to tackle the interest right away? As soon as you borrow money from a lender, the interest starts accruing. Since it’s added each day, the interest amount will increase even though the rate is fixed.

A Real-World Example

If you want an example, it’ll help to scrutinize what a $15,000 loan with an APR of 6.99% would look like. Assuming the payment plan stretches out for 72 months, your payment of $255.66 for the first month will entail $86.39 for interest and $169.27 for the principal. At that point, the loan balance will already have gone down to $14,831.72.

If you look at the schedule for the 8th month, you’ll see that the payment going toward the interest has already dipped below $80.00. Four months before your final payment, you’ll be glad to know that there will end up being so little interest that the vast majority of your payment will go toward the principal. To be exact, $5.87 of your payment for that month will go toward the interest while $249.79 will go toward the principal.

Are You Ready to Pay Your Loan Amount?

Now that you’ve learned how to calculate payments and costs, you can create a timeline for when you can pay your loan amount in full. If you want as little trouble as possible when paying off your loan, having a long-term plan can make a whole world of difference.

FastLoanDirect is your go-to source for personal loans that are quick and fair. Whether you need a small amount or something in the tens of thousands range, we can try to help you out.

Be sure to fill out this convenient form and take your first step toward potential approval.