Repaying a loan can be an important part of a budget, and it is, therefore, important to know the real cost. Good Credit gives you some tips for calculating the repayment of a loan.
First of all, it seems essential to take a little interest in the credit mechanism to understand how it works. The first point to know is the distinction between a fixed rate and variable rate loans. The fixed-rate loan is one for which repayment is made with a rate that remains the same from the beginning to the end of the repayment period.
Conversely, the variable rate loan is one whose percentage of interest varies according to adjustments in interbank rates.
Calculate the repayment of a loan using an online calculator
In order to know and calculate the repayment of a loan, many websites offer tools with loan calculators. These tools involve filling in different fields.
The amount of the loan, namely the total amount borrowed if the calculation is made at the start of the repayment, or the amount remaining to be repaid if the calculation is made during repayment.
The interest rate: this is the annual interest rate applicable to the loan.
The loan period.
The date of the start of reimbursement.
Once these fields are completed
The online calculator will calculate the principal, that is to say, the capital remaining to be reimbursed. In addition, these online tools also provide a repayment schedule for the amortized loan, which is characterized by the payment of fixed monthly payments over time.
If the borrower pays less each month than the amount found by the calculator, this means that we should expect to catch up over time with monthly payments that will become more and more important in the future.
Manually calculate loan repayment
The bravest can try to calculate the repayment of their loan by applying the following formula: M = P × [J / (1 – (1 + J) –N)].
It should be understood that M represents the amount of the payment, P represents the principal, ie the capital borrowed, J represents the effective interest rate, and N represents the total number of monthly payments.
Once the formula is known, the steps to follow are as follows:
Calculate the effective interest rate “J”: the effective interest rate is calculated by taking the annual interest rate (for example 5%), then dividing this rate by 100 to calculate it in decimals (0.05). Then divide this rate by the number of payments made in a year (for example 0.05 divided by 12 if you make 12 monthly payments, which gives 0.004167).
Then establish the total number of installments “N”: for example, if the loan is repayable over 5 years at the rate of 12 monthly payments per year, the total number of installments will be 12 multiplied by 5, ie 60 installments.
Calculate (1 + J) –N: if we take the figures previously found, this gives: (1,004167) – 60 = 0.7792.
Then calculate J / (1 – (1 + J) –N): you must establish the difference between 1 and the answer from the previous step (this gives 1-0.7792 = 0.2208), then you must then divide J by the result found, which gives 0.004167 divided by 0.2208 = 0.01887
Calculate the amount of the monthly payment: you must then multiply the last result by the amount of the capital borrowed “P”. If you borrow 30,000 dollars, for example, you will have to multiply 30,000 by 0.01887 = 566.1 or 566 and around 10 cents.