Personal loan calculator is an automated tool that allows borrowers like you to determine the financial implications of personal financing arrangements.  It can help you determine monthly repayments, and your financial suitability. In a nutshell, a loan calculator helps you see if a loan fits into your monthly budget.

Understand the variables in a loan calculator

What are the two major variables in personal loan calculation?

First, the results depend on the loan principal. It refers to the amount you want to borrow, excluding its interest and fees.

For example, you want to take out a loan to renovate your home. The cost of renovation is $10,000. The principal on the personal loan will be $10,000. The lender charges 10% interest on the loan.

To calculate your monthly payments, the lender will amortize the loan, spread it out over the loan, and calculate each monthly payment. Your monthly payment schedule will include the following:

  • principal balance of the loan at the beginning of the month
  • total amount of your monthly payment
  • amount that goes towards reducing your principal
  • amount paid for the interest expense
  • principal balance at the end of the month

The principal goes down as you pay down the loan.

Second, the APR or the Annual Percentage rate (APR) determines the cost of borrowing. The percentage refers to the costs. For instance, your loan has an APR of 20 percent; you would pay $20 per $100 that you borrow every year. When comparing between loans with the same fees and additional charges, choose the least expensive loan, or the one loan with the lowest APR.

APR can be complicated. So, to be safe, use it as a starting point for comparing interest and fees from various lenders. Some APRs can include fees—so ask about the inclusions of the APR when calculating APR.

Can I rely on the lender’s online calculator?

The cost of the loan can be confusing. The APR may include certain costs you need to pay, while others quote numbers that refer to additional costs. So, it is important to ask the loan officer online about certain costs that you’re likely to pay, or if they have hidden those charges in their advertisement.

Determine your financing needs

There is a huge difference between how much you can borrow and how much you need to borrow. While you may qualify for a higher amount of loan, that amount may be two to three times higher than what you actually need. Even if you are financially able to make your payments, it will be smart to take only the amount that you need. Some people thrive on a balanced budget as a means of saving money for big ticket items. If you want to make the most out of your borrowed money it is advisable to create a budget and to stick to it, until you have fully repaid it.

A lot of people prefer unsecured personal loans because of its flexibility. You can use it to fund a vehicle purchase, to consolidate debts, renovate your home, take a holiday or inject money into your working capital. But, before you apply for a loan, ask yourself the following questions:

  • Do I have other financial resources that would keep me from getting into debt? If you saved enough money to pay for an expense why not dip into your savings? Or, you may ask for help from friends or family who may be willing to help you out. If you have no cheaper option, then go for it.
  • How urgent is my financing need? The urgency depends on the nature of the need. Hospital bills, car repairs and empty pantries won’t wait. But, if you could wait for your finances to improve before you take a holiday, maybe adding a little bit of patience may work.
  • Will I be better off financially if I take out a loan?

Where will you spend your money?

If you will borrow money for renovations, then you are increasing its value. At the same time, spending on yourself-like check-ups, treatment, or taking extra classes would add value to your life.

  • Do I have a stable income to repay the loan? You have to pay the borrowed money within the specified period. So, make sur that you are already able to gain traction during that period so you won’t miss your payment schedules. For example, if you are in between jobs, it will be helpful if aside from spending the money on your urgent needs, you will also use a portion of it to augment your income. You can start a small business or take part time jobs to do it.

Personal loan calculator is merely a guide in helping you find the right loan product that is suitable for your financing needs. Don’t forget to ask your loan officer about other costs that you may have to pay, to avoid unpleasant surprises.

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