How to Efficiently Calculate the Loan Amount You Can Borrow
Nowadays, taking out a loan is easy. It became an avenue for seeking additional financial assistance, whether to use the borrowed amount for business purposes, emergencies, or personal intentions. With this accessibility, everyone can take out a loan anytime they want. Provided they have a good credit standing and have the necessary requirements to be eligible for it.
But sometimes, borrowers tend to forget to calculate how much loan amount they can borrow that suits their current financial situation. Unfortunately, others go overboard with their loans and face additional financial problems instead of solving them.
To avoid this unfortunate situation, you should know how to calculate your loan amount personally. This way, you can also project how to repay it without incurring additional charges that may become a burden in the future.
Loan Payment Calculations
Let’s start by understanding what loan payment calculations are and why you should know them before taking out a loan.
Loan payment calculations are a calculation set to provide you answers whether you can afford to borrow money or not. These calculations will show you how much you need to pay for each month during your entire loan term. It can also help you identify if it’s going to be affordable for you or if it will be too expensive.
Different Loan Payment Calculations
There are two primary and widely used loan payment calculations being used by different lenders. You can encounter them in almost all loan types available in the finance market.
Interest-Only Loans
Interest-only loans are also used in mortgage loans as much as it is popular in personal loans. Interest-only loans are easy to understand. Once your lender offers an interest-only loan promo, you only need to pay the interest rate for a specific period.
Once the interest-only period ends, you need to handle either paying the remaining balance at once or start making the monthly repayments, which is expected to be higher than the interest-only payments.
Amortizing Loans
This is the most widely used loan payment calculation and method when taking out a loan. When your loan is amortized, it means your loan is spread out into a series of fixed payments. Others called it scheduled monthly repayments.
In an amortizing loan, a portion of your payment goes toward both the principal amount and the interest rate. All of these details are well stipulated in your loan agreement form once you’re approved.
How to Utilize Loan Payment Calculator
Have you ever wondered why most financial institutions offer you to use their personal loan payments calculator?
It’s because it can significantly help you determine how much loan amount you’re only capable of repaying. It can also be a determining factor if your current financial status is enough for you to take on a new loan.
Though using a loan payment calculator can help you, it is still not substantial for how much you can borrow. It can only give you a projection of how much the total cost of the specific loan amount you intended to apply to receive.
How Are Loans Calculated?
You might be asking how loans are calculated since, in the loan payment calculator, you’re only shown with the loan amount you want to borrow, the duration, and the APR.
Let’s get into the factors used to calculate your loan.
Capital Loan Amount
The capital loan amount is subjective even if you wrote a specific amount you wanted to borrow down on your application form. Your final loan amount is affected by your credit score and the capacity of your lender.
Interest Rate
Your interest rate, as well, is greatly affected by your credit score. The typical logic is, the higher the loan amount, the higher the interest rate affects the total cost. But if you have a high credit score, you will enjoy a much better interest rate offer by your lender.
Loan Duration
Loan duration is the loan term. It specifies how long you’re going to pay for your loan amount. The longer the loan duration is, the cheaper monthly repayments. The shorter the loan duration is, the higher your monthly repayment will be. Though, there’s a catch in setting your loan duration.
Other borrowers think that they have saved money when choosing an extended loan duration due to low monthly repayments. But the truth is, they are spending more. On the other hand, a shorter loan duration with high monthly repayment allows borrowers to save more. They can finish their loan term right away and save more money from paying off the interest.
Borrowers’ Insurance
Taking out borrowers’ insurance is an individual preference. A borrower can decide not to file for insurance. Hence, it will not be included in the total loan cost.
Application Fee
Application fees and other incurring fees are also additional factors in calculating your total loan cost. Other lenders charge an origination fee, processing fee, and even closing fee. So, ask your lender what the other fees you should handle to prepare your finances in advance.
Takeaway
Anyone can take out and file for a loan application, but it takes a smart and wise individual to take out a loan responsibly. Recklessly taking out a loan without considering the current financial status and resources can be a burden to your finances. It can even create further issues that will take a while to be resolved. One effective way of being responsible with your loans is calculating the money you plan to borrow and gauging if you can pay it off.