Personal Loan Calculator
What is a Personal Loan?
A personal loan refers to debt taken to finance private spending, encompassing a wide variety of loans such as mortgages, auto loans, overdrafts, and credit card debts among others. However, in everyday life, when we talk about personal loans, we typically refer to unsecured personal loans.
These are types of loans that do not require you to put down any collateral to get the loan, making the process less complicated and shorter compared to secured loans like mortgages. Also significant is the payback period; unlike mortgages which could extend for as long as 30 years, unsecured personal loans typically have much shorter payback periods.
Unsecured consumer loans vary from credit cards and overdrafts in terms of the lending period and how interest rates are defined. Unsecured loans allow borrowing a certain amount of money over a specific term at a fixed interest rate.
Traditionally, entities such as banks, credit unions, and pawnshops provided these loans. Still, in recent years, many online platforms have begun offering P2P loan services, swiftly gaining relevance due to the more favourable terms they provide.
Times you might consider a personal loan are numerous and include soliciting the loan for car purchases, home renovations, financing holidays, weddings, covering medical bills, consolidating other debts, investing in a business, or even financing a dream.
How to Use a Personal Loan Calculator?
When it comes to working out the cost of a loan and how much one needs to set aside for monthly repayments, a personal loan calculator can be an invaluable tool. To use a personal loan calculator, you start off by inputting the loan amount. Here you enter the amount you intend to borrow.
Next, you select the payback period, otherwise referred to as the 'loan term', which can be expressed in either years or months. And finally, you enter the yearly interest rate into the calculator. If you're unaware of how to compute the annual interest from a monthly or quarterly interest rate, financial tools like an APY calculator could prove useful.
The calculator will then display the result of its computation in the field titled 'monthly payment'. This amount represents what you'll have to pay each month to satisfy your debt.
You also have the flexibility to adjust parameters based on your financial capability or preference. If you find that the monthly payment is more than you can comfortably afford, you could try to increment your payback period, or maybe reduce the initial debt amount or the interest rate. However, bear in mind that the interest rate is largely dependent on the lending institution.
An Actual Example to Demonstrate the Calculator
Let's say, for instance, you decide to take out a loan of $1,000 to purchase a home theatre system. You arrange for the repayment period to be two years. If we input these values into our calculator, we find that you would be required to repay $43.87 each month for the next two years to clear your debt.
To get the total cost of the loan, multiply the monthly payment by the total number of months, which in this case is 24 months. That gives a sum of $1,052.91 as the total amount repayable.
So, putting it all together, if you borrow $1,000, the total charge for your loan, i.e. the bank's profit, will be $52.91 ($1,052.91 - $1,000). This value represents the total interest you would have paid for the loan over the two years.