Basic Loan Calculator
Are you thinking about buying a home or starting a business venture? Either way, you’ll probably have to secure a rather large loan. This calculator can help you compute your loan’s monthly, biweekly, or weekly payment and total interest charges. With this information in mind, you can better evaluate your options.
First enter a principal amount for the loan and its interest rate. Then input the loan term in years and the number of payments made per year. Click on CALCULATE and you’ll instantly see your periodic payment amount and the total interest you’ll pay during the life of the loan.
6 Things to Consider Before Applying for a Loan
Acquiring a loan is a scary process for anyone. Increasing your level of debt impacts your financial portfolio in myriad ways. To take this bold step, you must have the confidence that you can make all your payments, the credit score to attain the trust of a potential lender, and a strong understanding of the process. Here are six key considerations about applying for a loan.
Identify How Much You Need to Borrow
Before you begin studying potential interest rates and loan qualification requirements, you must understand what a loan means with regards to your future. With a loan, someone provides you goods or services in exchange for a future repayment, presumably including some amount of interest to incentivize the lender to agree to the transaction.
The primary focus of the research phase should be personal. You will need to decide whether you actually need a loan prior to your first contact with a lending business. Your lender will be discussing countless potential transactions when you engage them in negotiations. While most major lenders provide expert analysis from quality loan professionals, they only make money by selling you their services.
Before you enter into such negotiations, you must identify exactly how much money you need to borrow. If you are taking out a personal loan to consolidate debt, you will obviously need less money than if you are acquiring a business loan, purchasing a vehicle, or buying a home.
Simply understanding the amount of the loan needed is not enough, though. What you must show precisely is how much money you can afford to pay back. If you miscalculate this amount, you could have your credit score ruined. Even worse, if you put up collateral for your loan, you will lose that property as well.
In addition, if you have purchased a car or home, they will be repossessed or foreclosed. You will have nothing to show for the significant amount of money you have paid before falling behind on your payments. Acquiring another loan after such an event is a practical impossibility for as long as seven years. That is the length of time your FICO score is downgraded due to a foreclosure and your credit score dinged for a repossession.
How can you determine the right loan amount for yourself? Utilize an online calculator like the one above to estimate potential scenarios. Start with the lowest amount of a loan you believe you may need to set the basement. Then, calculate the largest sum of money you believe that you could borrow while still making your payments. Finally, crunch the numbers to determine a loan amount that makes you feel comfortable.
Be careful, though. Chances are you have literally been paying nothing before acquiring your loan. Now, you are willingly choosing to cede a certain percentage of your monthly income that you will direct toward lender repayment. Consider every doomsday scenario imaginable to be sure that even if the worst occurs, you are comfortable making your payments.
Understand the Math of a Loan
You have now identified exactly how much money you need to borrow. The catch is that this number fluctuates, whether you realize it or not. Your interest rate plays a role in your monthly payment. A lower interest rate from a lender translates to lower payments for the same amount of borrowed money.
If the concept sounds confusing, here is an example. Presume you want to borrow $10,000 for a five-year loan. Now assume your interest rate is the same as what a credit card would charge, roughly 18 percent. Your monthly payment would be $253.93. Over the life of the loan, you would be required to repay $15,235.80, which means that you will pay $5,235.80 or about 52 percent more than your initial amount borrowed.
Next, presume that you have exceptional credit and the ability to garner a loan at 5 percent with the same requirements as above. Your payment plummets to $188.71, which is a monthly savings of $65.22 as well as annual savings of $782.64. Over the life of the loan, you will repay only $11,322.60 or approximately 11 percent more than the first amount borrowed. You have borrowed exactly the same amount of money yet you are paying nowhere near as much.
There is a staggering difference in the two scenarios. It is an excellent example of how important getting the lowest interest rate possible is to a potential borrower. The difference in interest rate costs from a credit card to low-interest loan can be as much a factor of five over a five-year period.
This occurs because in most lender agreements, the borrower pays less money toward the principal of the loan in the earlier part of the contract. Later in the life of the loan, more money is directed toward the principal since the interest has largely been paid off by then.
A loan with a better interest rate has less money that needs to be directed toward interest repayment, so more money goes to the principal earlier in the life of the loan. As such, the interest charge is smaller and the monthly payment is thereby smaller.
Your Credit Score Is Crucial
Armed with this information, your point of attack is clear. You must attempt to find the lowest rate possible for your loan. In order to do that, you have to take a hard look at your personal history. Specifically, you need to know your credit score and understand exactly what this information means to a lender.
Your history of payments is considered by potential lenders as an indication of your character. You see your monthly payments as an aggravating process that drains money out of your bank account. A lender sees it as indicative of whether you are a person of your word. If you sign a contract with your utility company to pay for the amount of water and electricity that you use during a given month, how well you live up to your end of the bargain is important.
A lender wants to know that you have a track record of honoring your scheduled payments as much as possible. Your credit score has been monitored by a third party who then relays this information to the would-be lender. What goes into your credit score calculation is a subject of some speculation. There are fluctuating variables depending upon the credit service used.
The three major credit services are Equifax, Transunion, and Experian. Each of them will have a slightly different score for you. Learn each one to be best prepared for negotiations with lenders. Surprisingly, most creditors do not use all three, instead selecting one company as their exclusive credit score provider.
So, you should learn all three of your scores, something you can do for free online. Then, try to find a lender who employs the services of the company who grades you with the best credit score. With a minimal amount of effort, you can lower your interest rate and save yourself a great deal of money over the life of your loan.
What to Do If Your Credit Score is…a Work in Progress
Researching your credit score can be a terrifying process. Pulling up your scores can provide a similar feeling to pulling up your final grades for the semester. If your score is not what you want, don't panic. The first step you should take is to verify that all the information is correct. While the statistics are in dispute, as many as 79 percent of all credit scores contain at least one error.
A major mistake on your score such as falling victim to identity theft could lower your score dramatically, which you now realize can cost a lot of money due to higher interest rates. Work with the credit agencies to correct any glaring mistakes. If you have an unfortunate track record with payments thus far, understand that your credit history only goes back seven years. From this point forward, determine to pay all of your bills on time, and you will be rewarded with much better credit scores in the future.
What Your Credit Score Means Right Now
In the interim, you must identify whether you can qualify for a loan at all. Your credit score will be graded on a scale from 300-850, and a higher score is better. If your grade is lower than 600, you will struggle to get credit. Even if you do, your rate may be so high that you are better served waiting until your credit score improves rather than borrowing money.
A credit score higher than 700 indicates that you pay your bills on time. A score in excess of 760 means that you will be getting the best possible interest rates, which is understandable. After all, you pose the least risk of failing to live up to your financial obligations.
If your credit score is in the 600-700 range, all three services will consider you a fair risk, which means that they believe you probably will pay back your loan. They are not absolutely certain of it, though. Due to their concern, you will be charged a higher interest rate as a sort of precaution.
Thinking of it from the perspective of the bank, they earn the most money early in the life of the loan when you are paying toward the interest more than the principal. By giving you a higher rate, they protect their investment somewhat. In the example above, think about how much of a difference there was between the two rates.
Now, consider how much money the higher interest loan earned the borrower early in its life cycle. If you eventually fall behind, the lender has still gained money from you. Also, this interest revenue is probably enough to justify the initial financial outlay even if you wind up not repaying your total debt, assuming that you have used collateral or your purchase can be foreclosed or repossessed. This dynamic is the underlying structure of dispensing interest rates predicated upon credit scores.
That's Great for the Future, but What About Now?
In the social media era, your options for money lending are vastly expanded from the 1990s when giant banks claimed a virtual monopoly in the industry. If your loan is for a small amount, consider a company such as Kiva.org.
The site utilizes crowd-funding to balance the onus of lending across a great number of people. You are not borrowing $10,000 from a company such as Wells Fargo but instead $100 from someone in Virginia, $75 from someone in Utah, and so forth. You receive the $10,000 as a lump sum, but your individual payments are directed toward a large volume of people who have shared the expense of the loan.
Kiva is an especially strong consideration if you are a small business seeking a relatively conservative amount of money. If you qualify for the Kiva Zip program, you can borrow up to $5,000 at zero percent interest. No matter how great your credit score is, you will never beat zero percent. The people loaning the money are business-minded professionals who want to fund struggling companies in their early years. By doing so, they increase the odds of such fledgling start-ups becoming strong job providers in future years.
If Kiva is not for you, other options in the crowd-funding industry include Prosper.com and LendingClub.com. Both organizations structure their loans in such a way that responsible borrowers are rewarded over time. The interest rate you receive on your first loan is predicated upon your credit score, just as happens with other major lenders. Once you complete that loan, however, your next loan will include a significantly lower rate.
The thought process is that you have proven yourself as a reliable borrower. These companies are less interested in profit than in providing a satisfactory experience and thereby improving the lender/borrower dynamic.
Taking out a loan is one of the scariest things a person can do. Now that you are better informed about the process, however, you should be fully prepared to unearth the best deal possible for yourself, thereby saving a ton of money in the process.