Calculating Your Loan Payment

Discover how to prepare for taking out a loan. Learn how to make a payment plan, prepare for interest rates and using a loan payment calculator.

There are many large expenses you are unable to pay for outright. Even if you have the funds available, it may not be advantageous to make the entire payment up front, especially if it means draining your savings. If you need to cover a large expense, such as buying a home, paying for tuition or getting a new car, you can take out a loan.

When you take out a loan, you negotiate rates with a lender. Your lender agrees to give you a certain amount of money to cover your expense. In exchange, you pay the loan back over the time, with interest. Your interest rate is determined by a percentage, known as the annual percentage rate (APR). You can multiply the interest rate by the total amount you borrow to determine how much it takes to pay off the loan. For example, a $10,000 loan with 5 percent interest results in you paying the original $10,000, plus an additional $500 over the course of your payment plan. There may be additional fees with your loan, such as late fees if you do not make minimum monthly payments.

Loan Purpose

Taking out a loan, even a small one, is a big financial decision. When you are selecting a loan, you want to consult with multiple lenders and take the time to research all the available options. Before you commit to taking out a loan, your first step is to determine the purpose of the loan. Small loans typically take between three to five years to pay back. Larger loans, such as a mortgage payment, take anywhere from 15 to 30 years. Because it takes so long to pay back, taking out a loan has a significant impact on your budget.

You must decide if taking out a loan is the best decision. It is recommended to only use a loan for a significant life purchase, such as buying a home or going to school, or for an emergency situation. If you are planning for a significant purchase, consider all other financial options before you commit to a loan. For example, you can see if there are any housing grants or scholarships for your school.

If you need a loan for an emergency situation, first look into your savings account and see whether you can afford to make the payment without assistance. Even if you can’t make the full payment with your savings, using some of your savings to make a partial payment and taking out a loan for the rest will reduce how much you owe.

If you can wait to make the purchase without any negative repercussions, then it is not an emergency. Some examples where you typically do require an emergency loan is to pay for an unexpected medical bill or making a major repair to your home or vehicle.

Choosing an Amount to Borrow

Once you’ve decided whether you truly need the loan, the next step is to figure out how much to borrow. Whenever possible, you do not want to borrow the total amount for your loan. The greater the loan, the more you end up paying over time in interest. It is also harder to negotiate for favorable deals with larger loans, resulting in greater interest payments or stricter penalties if you miss a payment.

When you are preparing to take out a loan, try and set a monthly budget. Compare this budget to how much you make each month. This gives you a general idea of how much money you have every month to make payments on a loan. If it is not an emergency, consider waiting a few months to take out a loan. This gives you time to build up your savings. You can use some of your savings towards the total cost of what you want to buy, but the rest should act as an emergency buffer to make funds on your loan. This way, if there is an unexpected expense that comes up during the month, you can cover your payment without incurring any penalties.

Choosing a Lender

There are many lenders to choose from, each with different rates and eligibility requirements. You want to meet with multiple lenders to see who has the best deals. A good place to start searching for lenders is through your bank. If you cannot go to your bank for a loan, you can approach a credit union or a private lender instead.

While the application process varies depending on the lender, there are some shared similarities. Lenders always look at your credit score when you apply for a loan. Most lenders want you to have at least a good credit score, which is between 670 to 739. If your credit score is lower, you can still apply for a loan, but your lender is more likely to charge a higher interest rate. He or she may also ask for a secured loan, which means you must provide collateral. If you default on your loan, your collateral is used to cover the remaining costs.

Calculating your Loan Costs

If you are trying to figure out how much your loan costs, there are many calculators available online. These calculators allow you to enter all the details of your loan, such as interest rate and repayment plan. There are also calculators for specific types of loans, including: