Calculating a Loan Repayment

Answer 1

When getting a loan, you receive a large lump sum of money at once to make a purchase such as a car or home. They are also useful if you need to pay for educational expenses such as tuition, living expenses, fees or textbooks. Before accepting a government or private student loan, you'll want to calculate the loan repayment ahead of time so you know what you're agreeing to.

Principal and Interest Rate

The first thing to look at for loan repayment is the actual amount of the loan, which is also referred to as the principal and doesn't take into account interest or the fees associated with the loan. The interest rate on your loan also affects the amount you'll need to repay. Interest rate is one of those factors that should determine whether or not you select a specific company for your loan.

Term of the Loan

The term of the loan impacts how much money you will be paying in interest costs during the lifetime of the loan. As the principal balance gets paid down each month, the amount of interest also decreases. A shorter loan term will save you money in interest, but will require you to have larger monthly payments.

Example Loan

Assume a loan was taken out for $1,000 with a 7% interest rate for 12 months. The monthly payments work out to be $86.53/month, while the total interest paid during the year is $38.32. If the term is extended to 2 years, which is 24 months, the monthly payments are cut almost in half down to $44.77, but the total interest paid is also nearly doubled at $74.54.

As a borrower, it is up to you to analyze your financial situation to determine whether or not the higher monthly payments will work into your budget or if you're willing to pay more in interest for the convenience of a lower monthly payment.