How to Calculate a Bank Loan
Once they decide to borrow some money from a bank, people generally start worrying about obligatory monthly payments first. Is this loan acceptable for you, given your monthly income and other necessary expenses?
A great idea is to use a loan payment calculator to help you find the right answers and check whether you will be able to repay the loan. If you learn how to calculate the interest rate for the loan, you will have a better understanding of the whole contract before you decide to sign it. So, here is what you need to know about calculating a bank loan.
#1 Learn About the Benefits of Using a Loan Calculator
It’s a wonderful option to receive a fast answer with the help of such online calculators. The help potential borrowers grasp the idea of the bank loan and demonstrate them how future decisions may affect their finances. For instance, you may compare the outcome of taking out a small sum of money or borrowing with a lower interest rate. Once you know what is better for you, you can negotiate the interest rate and the loan terms with the bank.
It’s important to know how much you can actually afford to pay back on a monthly basis to figure out how much you can borrow. So, loan repayment calculator facilitates this process and helps to know what to expect. How can you know whether taking out a personal loan is the right decision?
Firstly, ask yourself what you need the money for. Do you need to eliminate another high-interest debt? Are you willing to pay off the urgent bills? In any case, you need to find the most affordable loan option. Sometimes even a personal loan with a lower interest can give you larger monthly payments. Other bank loans may be with variable interest rates which tend to get higher after a certain time period.
#2 Consider the Interest Rate
Secondly, consider the interest rate of the potential loan before you actually start calculating it. Did you know that in order to qualify for a loan with the lower interest rate your credit score needs to be high enough? So, if you have some time before you will need to take out extra funds, pay attention to your credit score and start building it up if it’s not very high. The best way to do this is to pay all your bills on time and check the credit reports.
When you’ve checked and built your credit score, it’s time to shop for the best loan option. Don’t hesitate to visit several banks, compare loan terms from various credit unions and peer-to-peer lenders. Watch out for any penalties and extra fees that can make your life harder and may prevent you from repaying the debt on time. Always read the terms and conditions of the loan thoroughly. Avoid bank loans with exit fees (some lenders may charge them after the borrower repaid the loan in full).
#3 Select a Personal Loan Calculator
After you’ve shopped for the most suitable and affordable loan option, it’s time to choose a loan calculator. There are various calculators and other financial software for various types of loans. For instance, borrowers don’t have to repay anything in the early years with interest-only loans – they just pay the interest. With amortizing loans, you will need to repay the loan balance over a certain period of time. You may use the following options:
- Use a common loan calculator: Go online and choose Google Sheets calculator for any auto or home loans. It will do the math part for you.
- Build a spreadsheet: Microsoft Excel and Google Sheets can also be useful for creating more detailed spreadsheets to calculate your repayments year-by-year. If you still find it difficult, here other several examples of payment calculations to help you out and show how it works.
Taking Out a One-Year Loan
Let’s take the example of a borrower willing to take $1,000 from a bank for a period of one year and having to pay $70 of interest. This is how a loan payoff calculator works:
Interest Rate / Principal = Effective Rate on a Common One-Year Loan. So, $70/$1,000 = 7 percent – this is the interest rate you will need to pay off.
At the same time, if you keep this sum of money for a shorter time period, this bank loan will become less attractive. For instance, taking out $1,000 for a period of 180 days and the same interest rate of 7 percent will make your annual interest much higher.
Effective Rate = Interest Rate/Principal X Days in the Year (360)/ Days of Your Loan
$70/$1,000 X 360/120 = 14 percent
Here the effective rate of interest will be twice as high as the borrower will use the loan funds for less than a year.
To sum up, it’s essential to do the research and shop for the best deal first. Online loan calculators can help borrowers know whether a certain loan is affordable for them in the long run. Be a responsible borrower and only take out the amount of money you know you will be able to pay off.