When you borrow money from a lender, or technically, taking a loan, there’s a certain amount of time where you’re not required to make the repayments. However, once the time comes to repay the loan, things get a bit overwhelming. You should you start thinking of ways to obtain the money for repayments, and now is the time to start taking your finance management seriously.

Before thinking of paying back the loan, you must first figure out how much you actually need to pay back. For that, you’ll need to know how to calculate loan repayments.

Fortunately, there are several ways to do this, especially if you’re planning on doing it online, but before you get to that part of this topic, you should first understand what loan repayments are.

What Is Loan Repayment?

Loan repayment refers to the act of paying back the money you owe to a lender as a result of borrowing money in the past. The amount includes both the principal and the interest. The principal refers to the amount of money you received from the lender, while the interest is a percentage of the principal which the lender charges you for taking the loan.

Take note that different lenders have varying interest rates. If you’re on the lookout for a lender with relatively low rates, you might take interest in moneytrumpet.co.uk.

Calculating Monthly Loan Repayments Using A Formula

The traditional method of calculating loan repayments is by using a formula and doing the computations via a physical calculator. If you know the formula, this method should be doable.

However, it’s worth noting that there are different loan repayment methods, and each one has different formulas. For that reason, it’s important to check whether you’re using the right formula.

On that note, here’s a closer look at the three most common types of loan repayment calculation methods:

  • Interest-Only Loans

These are loans where you don’t pay for any principal. Rather, you are to focus on paying only the interest, which you can calculate using the following formula:

Divide the annual interest rate (R) by the number of payments per year (N), which is typically 12 since that’s how many months there are in a year. You must then multiply the resulting interest rate by the amount you borrowed (P), also known as the principal. After doing so, you should be able to get the amount of monthly loan repayment.

For example, if you take a loan of  USD$500,000 at an annual interest rate of 6%, the computation would be as follows: ( 6% / 12 ) x $500,000 = $2500

  • Amortizing Loans

The terms for amortizing loans are a bit different from the previous type. Rather than paying only the interest, with amortizing loans, you’ll be paying both the principal and interest instead. In this case, the interest is based on the outstanding balance. Since you’re reducing your outstanding balance every month, you’re reducing the interest as well.

The amount you pay for the interest and principal changes over the loan term, while the monthly payment remains the same. Unfortunately, there’s no formula for this type.

  • Credit Card Loans

A credit card loan is a loan that you must repay monthly. It works similarly with interest-only loans, except the interest constantly fluctuates, so it takes more effort to calculate

You can, however, still calculate it using this formula:

Divide the annual percentage rate (APR) by 12 and multiply the result to the principal. You should be able to find your credit card’s APR by looking into the lender’s website.

These are the three most common loan repayment methods. As you can see, they each have different formulas, so you must also keep in mind the repayment terms of the loans you’re taking. However, even with these formulas, you may still struggle to calculate the loan repayments. If that’s the case, you may need the help of an online loan calculator.

Using Different Types Of Online Loan Calculators

There are calculators on the internet that you can use to effortlessly calculate the loan repayments you must make every month. They do the computations for you, and you only need to enter the necessary inputs, such as the annual interest rate or APR, principal, and loan term.

When searching for an online calculator, make sure you include which type of loan calculator you’re looking for, since there are different types of calculators, each using different formulas.

Examples include student loan calculator, auto loan calculator, mortgage calculator, and more.

Final Words

Mistakes are extremely common when calculating monthly loan repayments. Not only should you make sure your computations are error-free, you must also determine what type of loan you’re dealing with to confirm if you’re actually using the correct formula. It is good to know that there are calculators you can use to make your life a lot easier.

 

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