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How to Calculate Your Personal Loan Monthly Payment
When looking for a personal loan, it's fairly easy to find a calculator online. And those personal loan calculators can be helpful because the math can get a bit complex. Try TD Bank's Personal Loan Payment Calculator to see an example.
The calculators vary to some extent but knowing the general process will help you see how loan calculation really works. It helps you to see how the different elements are related and affect one another. Even a slight change in one can make a significant difference in monthly payments.
In this article, we'll review some of the methods used when calculating personal loans. Learning about what's involved may help you when making decisions about personal loans.
What's the formula to calculate a personal loan?
For loan calculations, three figures are typically required:
- The principal: How much is borrowed
- The interest rate: The cost to borrow money expressed as a percentage
- The loan term: The loan duration and number of monthly payments
Once you've determined those, they can be plugged into a loan formula. The formula looks like this:
A = P{[r(1+r)n]/[(1+r)n-1]}
A is the monthly payment.
P is the principal.
r is monthly interest rate.
n is the loan term in months.
Yikes, right? Let's look at what goes into that formula.
Amount of monthly payment
Here we have the dollar amount of your estimated monthly payments. In the formula, it's "A." For loan calculation purposes, the amount of the loan payments (A) should include any fees or charges the lender might add before a loan is made.
Principal
The loan principal is the loan amount you wish to borrow, represented as "P." When figuring out your loan, it may be best to keep the principal in line with your actual needs. The more you borrow, the more the loan may have the potential to lower your credit score, affect your credit report and cost you money. However, loan amounts too low may make it hard to meet your financial needs and another loan might be needed.
The principal borrowed for many personal loans is used for debt consolidation. People often take the high annual percentage rates of credit card debt or another existing loan and try to convert it into a personal loan with a lower interest rate.
Personal loans are also used for large purchases, like boats, vacations, and home improvements. Or you might need extra funds for medical bills, costly vehicle purchase or repairs or other emergencies. A small business owner might use a personal loan to buy new equipment. There are many other reasons. As well. And because they're unsecured loans, you don't have to stake your home or other assets as collateral.
Interest rate
In the formula, "r" stands for the monthly interest rate. Interest rates provided by lenders is the cost you pay each year to borrow money expressed as a percentage.
When lenders advertise personal loan interest rates, it's typically a fixed rate, meaning the rate would be steady for the entire length of the loan. Note that what you are shown are "estimated interest rates." Rates may change after consumers apply for a loan and the lender evaluates their creditworthiness.
Many personal loans use "simple interest" instead of "compound interest." Simple interest loans are based only on the principal amount of a loan. Compound interest (which is used in many home mortgages and credit cards) is more complicated and may be more expensive.
Credit scores (based on your credit report) have a major impact on the interest rate a lender will offer. If you have a solid credit history, on-time payments, and a low debt-to-income ratio, you may have a good credit score. Expect lenders to offer you more favorable interest rates.
If your financial history is not as solid and your credit score range is on the lower side, anticipate higher interest rates. Over the life of the loan, you will pay more interest. You might consider speaking with a financial advisor, who might be able to help you raise your credit score before you apply. In turn, you may be offered better loan options.
Loan terms
The loan term refers to the length of time you take to repay the loan. This is generally referred to in months or years. Monthly payments can dramatically change when loan terms are changed. The longer it takes to pay off the loan, the lower the monthly payments will be. On the other hand, you pay more in interest charges for a loan with a longer term, all other things being equal.
These are the types of variables that make it very convenient to use a personal loan calculator and plug in the different figures to see what your options might be.
Lenders have minimums and maximums for loan lengths and amounts they will lend. And the range of interest rates offered will mainly be based on your credit score. TD Bank offers personal loans for a variety of purposes. Loan amounts and terms vary, and they include no prepayment penalties.
What does the calculator say?
Personal loan calculators let you play with the numbers and see how one value affects the others. Enter the amount borrowed, the repayment term (number of months) and average interest rate you hope to be offered. The calculator returns a monthly payment and the loan's total cost: principal, plus interest. Don't forget to factor in any fees.
TD Bank doesn't charge origination or application fees on personal loans. That can be helpful. For lenders that charge origination fees, amounts can be substantial. Fees of 5% or more are seen. Often that's subtracted from the total loan amount before you receive your funds, but you still pay interest on the full amount.