If you are interested in taking out a loan, the first thing you need to know is that you will not pay just the amount borrowed, but a higher value. Interest rates and other costs are added to the original amount, so you must be prepared to pay it when the time comes. This is why you must understand how to calculate loan payment.
A loan can be the best alternative for many people who struggle with small salaries and unforeseen expenses. If you are new to OneBlinc’s blog, you can read our other articles to understand more about the different types of loans. Now, it is time to know how to calculate loan payment easily!
What defines loan payments?
Each loan works differently according to the type, the financial institution, and the fees defined by the lender. This can be easily understood when you read the information available before you sign any agreement. All the main details about payment and the costs included must be in this document to keep both parties on the same page.
Usually, the amount borrowed is used to calculate the interest rate and other fees, such as late payment fee and prepayment penalty. For example, it is common that a few lenders don’t charge fees when someone pays off a personal loan earlier than what is expected. However, in general, there are even more fees for different actions taken.
As mentioned above, the loan interest is what the lender earns for lending money. It is not defined just by the demand, but according to the central bank, business needs, and individual aspects, such as credit score and credit history. The demand can affect it in positive or negative ways, by increasing or decreasing interest when it is most needed by the population.
To calculate loan interest rate, you can use online tools. It is the simple way to be prepared to pay the installments without difficulties. To understand the percentage of origination fees, application fees, documentation fees, insufficient funds fees, and late fees, you need to check with the lender.
All this information is described in the agreement, but if you want to know more about them, you can get in touch with the financial institution through email or telephone.
How to calculate loan payment?
Now that you know what can define the total amount, you better understand how to calculate loan payment. The first option and the most common is the loan simulation. With this simple tool, you can fill in the total amount borrowed, the loan term, the percentage of interest rate, the frequency of the compound interest and of the payment.
You can also do it by yourself, using a regular calculator or Microsoft Excel. The first thing you need to do is identify the loan type, the payment method (if it is monthly or biweekly, for example), and the interest rate.
This last one can be calculated by multiplying the simple interest by 100 and dividing it by the value of the amount taken multiplied by time. More easily, it can be shown as: interest rate = (simple interest x 100)/(amount borrowed x time).
After you have the interest rate, you can use it to calculate the loan payment. One of the formulas is for interest-only loans: (total amount borrowed x interest rate in decimals) / time. If it is a monthly payment, divide it by 12. An example is a loan of $50,000 with interest of 6% during a year: 50,000 x 0,6 / 12 = 250.
If it is a monthly amortization payment, you need to divide the interest rate in decimals by the number of installments (for example, 12 months). Then, multiply the total by the initial amount borrowed. The total will be the first monthly payment. One example is a loan of $30,000 with a 6% of interest rate, illustrated in: 0.06/12 = 0.005, following 0.005 x 30,000 = $150.
How to avoid higher payments?
It is not simple to understand how to calculate loan payment, but you can use online tools. Besides knowing the formula and the total of each installment, it is important to avoid extra fees that increase the payment.
The first tip to avoid higher payments is to take out a loan with the amount you really need. Don’t ask for more money than is necessary, because it will take longer to return it. The less you borrow, the easier it will be to pay in one lump sum if you can, without impacting your other expenses.
With smaller amounts, interest rates also tend to be smaller. It is important to calculate it before applying for the loan in order to avoid misunderstandings. More importantly is to avoid missing any payment date, because, if you do that, the lender will charge you a late fee.
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OneBlinc helped you to understand how to calculate loan payment and can also offer easier financial solutions. In case you need to take out a loan or open a checking account, count on us!
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