How To Use A Loan Calculator To Understand Your Monthly Payments And Overall Loan Costs

Any time one takes a loan it is important for them to have a clear understanding of the monthly payment they will have to make. This will enable the borrower to choose terms that allow them to repay the loan with ease, right at the time of taking up the loan.

To make sure the loan can be repaid on time, the borrower must carefully analyse the projected monthly repayment amount as well as the overall estimated loan expense.

These can easily be done through loan calculators that are now widely available for free. One can use this calculator to test out any loan that is under consideration. By changing the loan amount, loan term, and interest rate, one can get a sense of the possible overall cost and monthly outgo.

A loan comprises many components apart from the principal raised so one must be aware of all the elements that make up a loan to calculate the total monthly outgo.

Principal:

This is the basic amount taken up as a loan to be used by the borrower. In most cases, a part of the principal is repaid each month so that the amount gets reduced over time.

Fees:

There are a number of fees that are charged on the loan by the lender. These include application fees, to be paid at the time of applying for the loan; and late fees to be paid in case there is a default on the loan.

Some lenders also charge an upfront origination fee, which is automatically added to the amount owned by the borrower.

Interest:

Interest is the extra money charged by the lender to facilitate your loan each month. The interest rate on some financial products like auto loans and personal loans is typically fixed, meaning it does not change over the life of the loan. However, interest rates on some products like credit cards tend to be variable, meaning they fluctuate over time based on market conditions.

Tenure:

This is the time period in which the loan needs to be repaid. The repayment tenure should be chosen wisely by the borrower as it impacts the equated monthly installment, or EMI, that needs to be paid and the total interest payable on the loan.

A longer tenure would mean lower EMIs while a shorter time period would mean that the borrower would need to make a higher monthly payment. Having said that, a longer tenure would also mean that the borrower will pay a higher amount as interest over the time period of the loan.

Loan Calculator

The equated monthly installment or EMI typically depends on certain factors—the loan amount, the loan tenure, the interest rate, the monthly salary, or business income.

The best and simplest approach to determine loan payments and fees is to use a loan calculator. Using the loan calculator one can determine the exact monthly payment based on the size of the loan, the length of the repayment period, and the interest rate.

This calculator also allows the borrower to determine the total cost of borrowing, including all interest fees and loan fees. Therefore, it also helps to understand how much one can afford to borrow based on income and other factors.

To calculate the total cost of the loan to the borrower, one needs to add up the total interest charges for the entire period of the loan along with any fees that the lender charges. These are apart from the principal amount that is borrowed.

These days many free loan calculators are available online, however, it is best to use the one that is provided by the lender to borrow from. This will provide a better picture of the total outgo and resultant monthly installments one has to pay.

Conclusion

One needs to keep many factors in mind before opting for a loan including the rate of interest, tenure of the loan, and various charges and fees levied by the lender. The borrower must carefully calculate the total expected outgo on the loan as well as the monthly expenditure on the loan to ensure that it can be repaid in a timely manner.

Borrowers can use an EMI calculator like the one provided by IIFL Finance to calculate the money they will be required to pay every month for specific loan tenure. This easily accessible tool can help one decide quickly on the terms of the loan they should opt for including the tenure and interest rate.

Apart from EMI calculators, good lenders such as IIFL Finance also offer flexible repayment options that allow one to choose a suitable tenure. IIFL Finance also provides customised repayment plans to match one’s income flow or cash flows, depending on the amount of money one can easily spare each month.