Before discussing how to use a loan calculator, it may help to first understand how loans work.
How Loans Work
When you take a loan, you have to pay it back with interest. The interest rate on the loan plays a pivotal role in determining the total cost of the loan. However, interest rate is not the only factor that influences the total loan cost. The term of the loan also impacts how much it will cost you. More interest accrues over a longer loan term, which adds to the cost of the loan. The opposite is true for a shorter loan term.
In addition to influencing the cost of the loan, the interest rate and loan term also determine your monthly repayment amounts. Your monthly repayments will be higher if you choose a shorter term and lower if you choose a longer term. This is because the total loan amount (principle + interest) is divided in equal monthly installments over the loan term. With a shorter loan term, the payments are divided over fewer months. To finish paying off the debt within the agreed-upon time limit, you’ll have to pay more every month.
As you can see, there are several moving parts to taking a loan. First you have to figure out how much you need to borrow. Then you need to determine how much the loan will cost you at different loan terms. Finally you have to calculate your monthly repayment amounts at different terms to determine what will work best for you. The key is to find that sweet spot between lowering the cost of the loan and ensuring that the monthly payments are affordable. Both are equally important.
There are traditional formulas you can use to do this calculation but that can take several hours. Moreover it can be extremely frustrating. One little error can mean starting all over again. An easier and faster way to calculate the cost of the loan and your monthly payments is by using a loan calculator.
What Is A Loan Calculator? Why Use One?
A loan calculator is an online tool. Almost all lenders offer this tool on their site for the convenience of prospective borrowers. While the loan calculator design and layout may vary from one lender to another, they all have similar features.
All loan calculators are designed to give you quick answers to common loan-related questions such as:
- How much money can I afford to borrow?
- What will be my monthly payments if I borrow X amount at Y% interest?
- How long will it take me to repay the full loan at X monthly payments?
- How much is the total interest I’ll pay on the loan at different loan terms?
What Are The Advantages Of Using A Loan Calculator?
One advantage of using a loan calculator is that it makes it easier than ever to determine your monthly payments at different interest rates, loan amounts, and loan terms. It helps you compare loan costs and see how differences in interest rates and loan terms can affect your monthly payments. You’ll be able to find your “˜sweet spot’ within minutes instead of spending hours using the traditional formula.
Another advantage of using a loan calculator is that it allows you to create a loan amortization schedule. This is a table detailing each periodic loan payment owed monthly over the course of the loan. Some even display an annual amortization schedule. Each periodic loan repayment indicates how much of the payment is towards interest and how much is towards paying off the principal balance. Although the loan amount remains the same every month, the interest-principal ratios vary for each pay period. An amortization schedule is a convenient way to keep track of how much you owe and when each payment is due. It also helps you see how much is outstanding in interest and in principal at any time over the course of the loan.
The biggest advantage of using a loan calculator is that is helps you make sound financial decisions that work for your financial circumstances. You can use a loan calculator for any type of loan including mortgage, student loans, auto loans, or personal loans.
Here’s How To Use A Loan Calculator
Online loan calculators are very user-friendly. They have an intuitive interface with prompts that indicate what information you need to enter. After entering all the required information, you click the submit button and the tool will show you the results in less than a minute.
A loan calculator typically asks for these details:
Loan amount – This refers to the loan principal only. It does not factor in the interest rate or fees.
Interest rate – In this tab, you’ll have to enter the annual interest as quoted by the lender.
Number of months – The loan term is quoted in years. This is multiplied by 12 to determine the number of months and the monthly payments required to pay off the loan completely.
Monthly repayments – This refers to the amount that you have to pay towards the loan every month. These payments have to be made by the specified payment due date every month. The amount you have to pay back every month will depend on your interest rate and the loan term.
You can change the values against each column to identify which loan term will work best for you. Get familiar with how to use an online calculator if you’re planning on taking a loan or mortgage. You’ll be glad you did when you see how easy it is to use one and how it helps you make better loan decisions that work for you.
