There are lots of reasons why it may become necessary for you to take up a loan. You may need it as a down payment for a home or a brand-new car. Medical emergencies, especially for illnesses that entail hospitalization, are also legitimate causes of borrowing a substantial amount of money from banks and other financial institutions.
Manually calculating your repayments can be an extremely complex and complicated process. Fortunately, you can use a loan calculator, which makes the entire procedure more straightforward.
Here are the key ways that loan calculators can help you when paying your loan off faster:
1. Determine Monthly Repayments
Knowing how much money you should return to the lender each month can help you prioritize repayment of your debt. The information provided by loan calculators simplify the equation and give you the exact amount that you should allocate for this financial obligation.
You can integrate the amount into your monthly budget with ease when you have this calculation. Plus, you’ll have an idea of when you’ll complete paying back the money you owe.
These are the factors that influence your loan calculation:
- Loan Amount – This is the principal or money that the lender allowed you to borrow and the amount that you promise to pay back.
- Loan Term – It is the repayment duration that the lender stipulated in the contract. It affects the structure of the agreement. Typically, you end up paying more interest when you opt for an extended loan period.
- Interest Rate – The interest is the profit that banks and other lenders make when they allow you to borrow money from them. It’s the percentage of a loan that borrowers have to pay back, along with the principal repayment.
- Compound – Think of this as interest on interest. Essentially, it’s a fee that’s added to your principal when you miss a payment or only pay the minimum. It’s recommended that you make consistent and timely repayments to avoid additional costs to your loan.
- Payback Setup – Typically, a majority of people make monthly repayments for their debt. However, most loan calculators allow you to set how you want to pay back the lender. You have the options for quarterly, half-month, and annual calculations.
Being responsible for paying back the money you owe can affect your credit score drastically. A loan calculator can help you stay on track by providing you with the total monthly repayment needed for your debt.
2. Stay Updated on Interest Rates
Interest rates vary depending on your loan type. Moreover, they also change over time. This characteristic can affect your repayment budget, especially if you have opted for a longer loan term.
You can think of interest rates as the price of money. The changes are brought about by borrowers’ demand and supply of funds that are available to lenders. Economic growth, fiscal policies, and inflation are some factors that affect interest.
3. Know About Alternative Payment Options
Most loan calculators are created by lending companies that provide alternative payment options that make repayment more manageable. Some loans can be amortized or spread out into regular fixed payments per month while others can’t.
Examples of amortizing loans are:
- Auto Loans – These typically go over a maximum of five years and are paid with a fixed monthly payment.
- Home Loans – Home loans are paid through fixed-rate mortgages that span 15 to 30 years.
- Personal Loans – Money loaned to you by banks, credit unions, and online lenders are often amortized with three-year terms. You get fixed interest rates with your monthly payments.
Ones that can’t be amortized include:
- Credit Cards – This type of loan is known as revolving debt. You can borrow repeatedly and instantaneously on a single card. Plus, you have the freedom to choose the amount you’ll pay back each month as long as it meets the minimum due.
- Interest-Only Loans – This one doesn’t amortize during the interest-only period. You have to pay the cost of interest first before you can request for fixed monthly payments on the principal.
- Balloon Loans – Balloon loans require you to pay a substantial principal payment at the end of the loan term. In most instances, this loan is refinanced because most people don’t have access to a large sum when the due date comes.
4. Identify Consolidation and Refinancing Opportunities
If you have multiple credit accounts, it may be better to consolidate and refinance them by borrowing a considerable amount from one lender and using the funds to pay off your other loans. This way, you avoid having to pay interest and compound.
Loan calculators can aid you in seeing the bigger picture of your financial status. These tools can help you spot consolidation and refinancing opportunities where applicable.
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Loan calculators are useful tools in helping you become debt-free. They help you determine how much money you should allocate for your loan repayments without having you go through the complicated process behind the information. You’ll also stay updated on interest rates, as well as find alternative payment options and consolidating opportunities.
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