Repayment of a loan can be an important part of a budget, so it is important to know the actual cost. Creditstair gives you some tips for calculating the repayment of a loan.
Understand borrowing mechanisms
Above all, it seems essential to pay attention to the credit mechanism to understand how it works. The first thing to know is the distinction between fixed and variable rate loans. The fixed rate loan is the one for which the repayment is made with a rate that remains the same from the beginning to the end of the repayment term..
Conversely, the variable rate loan is the one whose percentage of interest varies according to the adjustments of the interbank rates. The second point to be known is the amortization, that is to say the difference the repayment of the amount borrowed which takes into account the capital in the strict sense and the amount of interest on loans and other ancillary costs..
Calculate a loan repayment 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 loan amount, ie the total amount borrowed if the calculation is made at the beginning of the repayment, or the sum remaining to be refunded if the calculation is made in the course of repayment.
- The interest rate: this is the annual interest rate applicable to the loan.
- The loan duration.
- The date of the start of repayment..
Once these fields are filled in, the online calculator will calculate the principal, ie the capital remaining to be repaid. 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 a catch-up in time with monthly payments that will become increasingly important in the future.
Manually calculate the repayment of a loan
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, that is, the borrowed capital, 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 calculation of the effective interest rate is done by taking the annual interest rate (for example 5%), then dividing this rate by 100 to calculate it in decimals (0.05). This rate must then be divided by the number of payments made in one year (eg 0.05 divided by 12 if 12 monthly payments are made, which equals 0.004167).
- Then establish the total number of “N” payments: for example, if the loan is repayable over 5 years at the rate of 12 monthly installments, the total number of installments will be 12 multiplied by 5 or 60 installments.
- Calculate (1 + J) -N: if we take again the figures previously found, it gives: (1,004167) – 60 = 0,7792.
- Calculate then J / (1 – (1 + J) -N): it is necessary to establish the difference between 1 and the answer of the preceding stage (that gives 1-0,7792 = 0,2208), then it is necessary divide J by the result found, which gives 0.004167 divided by 0.2208 = 0.01887
- Calculate the amount of the monthly payment: it is then necessary to multiply the last result by the amount of capital borrowed “P”. If one borrows for example 30 000 euros, it will then multiply 30 000 by 0.01887 = 566.1 or 566 and 10 cents approximately.