Knowing how to calculate your monthly loan repayments is important to determine if you can afford the amount of money you plan to borrow. When your calculations are higher than your limit, you can adjust your loan amount to what is suitable for your needs.
It is best to only borrow the amount of money you can afford to repay to avoid missed payments that will negatively affect your credit score. Hence, here are three steps that you need to follow when calculating your potential monthly loan repayment.
Recognize Your Loan
The first step in calculating your loan repayment amount each month is to know what kind of loan you are getting. You can acquire two loan types: the interest-only loan and the amortizing loan.
If you opt for the interest-only loan, you will only be required to pay your loan’s interest rate in the first few years. This is called the introductory period. You will not be obliged to pay the principal amount of your loan, which means that it will stay as it is even if you are regularly paying each month.
After the introductory period, you will then be required to pay a portion of your principal amount every month along with the interest rate. Interest rate after the introductory period is also subject to increase. Some lenders required their borrowers to pay the entire balance of the loan after the introductory period.
On the other hand, Amortizing loans required the borrowers to pay the interest rate plus a portion of the principal amount every month throughout the loan term period. You need to ensure that you pay your loan on time every time. Once you already know what type of loan you are getting. It is now time for the second step of calculating your monthly loan repayment amount.
Understand the Formula For Your Loan Type
This is the part where it gets confusing. You need to understand the numbers in the formula and the formula itself to fully comprehend the process. For the Amortizing loan type, the formula used is:
A = P [R(1+R)n]
(1+R)
A = the amount payable monthly
P = your principal loan amount
R = the interest rate of the loan annually
n = the total number of payments
For example, you borrowed $50,000 with an annual interest rate of 6% to be repaid within 20 years. The first thing you need to do is to convert the interest rate from percentage to decimal. Next is calculated using the formula given above.
A = 50,000 [0.005(1+0.005)240]
[(1+0.005)240-1]
A= 50,000 [0.005(1.005)240]
[(1.005)240-1]
A= 50,000 [0.005 (3.3102)]
[3.3102-1]
A= 50,000 [0.016551]
2.3102
A= 827.55
2.3102
A= 385.22
Therefore your amortizing monthly loan repayment for 20 years would be $385.22.
For interest-only loans, the formula is easier than the formula for amortizing loans. If you are going for this type of loan, here is the formula you will need to calculate your monthly repayment amount:
A = P x (R/12)
A= 50,000 x (0.06/12)
A= 50,000 x 0.005
A= 250
Therefore, you will be paying $250 as the monthly interest rate of your loan.
Use Online Loan Calculator
If you despised mathematics as a student, step number two might have given you a hard time. To make your life easier, loan calculators have been made available online for people like you who want to know how much they are paying when borrowing a specific amount.
There are so many loan calculators online, but you can also find one on your lender’s website. Alternatively, you can also speak with your lender and ask them to calculate your monthly payment for you.
Never acquire a loan that you cannot afford to pay back. You know your capacity to pay, so it is up to you to control your urge to borrow more than what you can manage to pay. The formula provided or the online loan calculator can help you determine the amount of money you can borrow based on how much you can afford. Use this tool everytime you inquire for a loan to help you choose which offer is the best.
No matter your reason for taking the loan, do not borrow more than what you need. In case you need a huge amount yet you can only afford to pay half of it, just follow your budget and think of an alternative to compensate for the deficit. You can use your savings or ask a family or friend to lend you some money to complete the entire amount you need.
Start Planning
Now that you already know how to calculate your possible monthly payment using the guide given above, you can now start planning on what kind of loan and how much loan you will be getting. You can now also add your projected monthly loan payment to your monthly expenses organizer to better manage all your finances.
This article appears in Jan 1 – Dec 31, 2021.
