Taking control / November 22nd 2020

How Do Loan Calculators Work

A person holding up puzzle pieces with the words “personal loan” on them.

Today, getting a loan has never been easier. With easy online loans in NZ, you can apply for a loan with just a few clicks of a button. Plus, you get the status of your loan application within just a few days. Numerous loan companies offer a quick turnaround time as fast as within 24 hours. While it’s easy to apply for one, the decision making that goes behind the application is what you should focus on. You need to consider what type of loan best fits your needs, how much the interest rates are, and for how long you’re going to pay them off. A popular way to get through the numbers is with the help of a loan calculator, but how exactly do they work?

Loan calculators – how trustworthy are they?

Before applying for any type of loan, you want to make sure you can afford it. Personal loan calculators help you know what to expect. Loan calculators work accurately so long as the information you enter into the calculator is correct, and the results will provide you with an estimate of what you will end up paying back on a monthly, quarterly, or yearly basis, so you can decide whether or not you can afford the money you’ll be borrowing.

Loan payment calculations

Loan calculators have standard calculations that they use depending on the type of loan you’re applying for. Here are the main calculations used when applying for a loan:

1. Interest-only

these are loans wherein you don’t pay down any of the principal in the early years. You only have to pay interest. For example, you borrowed $100,000 at 6% for 30 years to repay monthly. To calculate the payment, convert percentages to decimal, and follow the formula:

a*(r/n)

  • a: 100,000 – amount of loan
  • r: 0.005 (6% annual rate or 0.06 divided by 12 monthly payments per year)
  • n: 360 (12 monthly payments per year times 30 years)

calculation: 100,000*(0.06/12) = 500. The monthly payment will be $500

2. Amortized loans

these are loans that require you to pay both principal and interest over a set period. Applying the same values, the formula will look like this:

a/{{(1+r)^n}-1}/{r(1+r)^n}=p

  • a: 100,000 – amount of loan
  • r: 0.005 (6% annual rate divided by 12 monthly payments per year)
  • n: 360 (12 monthly payments per year times 30 years)

calculation: 100,000/{[(1+0.005)^360]-1}/[0.005(1+0.005)^360]=599.55. The monthly payment will be $599.55

3. Credit Card Loans

Credit cards offer you a line of credit that acts as a reusable loan so long as you pay it off in time. However, credit cards will most likely charge interest if you’re late on making monthly payments.

Calculating your monthly payments for credit cards will depend on what your balance is. For example, card companies may require you to pay at least 25% of your outstanding balance each month. Remember, it's always better to pay more than the minimum due each month to avoid late charges and hefty penalties.

Going beyond the numbers

With so many companies offering instant loans in NZ, using loan calculators can give you a good idea of what to choose as you calculate the total cost of the loan factoring in interest rates and fees. Be wary of relying on numbers alone, as low repayments don’t always mean you’re getting the better end of the bargain. For example, a loan with low repayments might have a longer loan length. The longer you have to pay a loan with interest fees, the larger the total cost of the loan becomes.

Apart from just looking at the repayment fees, you should also consider the following:

  • Interest rates – the higher your credit score, the lower the interest rate you’ll likely obtain, and this is why it’s best to build a good credit score if you’re thinking of getting a personal loan in the future. It’s also wise to compare interest rates offered by traditional banks, online lenders, and peer-to-peer lending sites. Look at the terms of the loans they offer and check out fees and penalties that may make it harder for you to pay your loan off.
  • Purchase price – before applying for a loan, figure out whether you can realistically afford to borrow money. If paying monthly fees will considerably hurt your budget, consider negotiating for a lower purchase price instead of lowering the monthly payment. Remember that low monthly payments can mean a longer loan term, putting yourself in a riskier situation.

Apply for a loan you're confident in

Keep in mind that all debt carries some risk. And that’s why you need to make sure that if you do decide to get a personal loan, it’s one you can confidently afford to pay off even without security. At Money Shop, you can apply for a personal loan between $200 up to $20,000 with quick and easy finance options. What makes us unique is that our money lending process is designed with flexibility in mind, allowing the loan to fit you, and not the other way around. Get in touch with us if you want to know more about your options or apply online today, and we’ll process your application in less than two hours!

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