Loan calculator

When you think about applying for a loan to buy a new car, renovate your home, consolidate your debts, or whatever the reason, you should have full knowledge of the responsibility you are going to take. Banks or other lenders usually use your credit score to track your finances and decide how much money they can lend you, they may also use one of your own properties as a collateral against your repayments. So, it’s important to know how much repayments you can afford per month considering your income and other monthly expenses in order to decide the amount of money you can demand as a loan.

A loan calculator is the quickest way of calculating monthly payments on a loan, you can enter the amount of loan you are willing to borrow, the length of time you will need to repay the loan, and the loan interest rate (APR) you will have to bear. Then, you will get a prompt calculation of your monthly payments. But, you need to understand how this process is done.

 

How to calculate monthly payments on a loan

 

There is no single formula by which you can calculate loan monthly payments, it depends on the type of loan you are going to take. There are two major types of loans, amortized loans and interest only loans.

 

Amortized loans

 

According to amortized loans, both the principle amount of the loan and its interest will be paid together over the period of the loan. At the end of the period, you will find yourself paid both the principle amount and interest.

Inputs are:

  • The amount of loan (A)
  • Interest rate per month (i)
  • Times of payments (n)

Amortized loan payment formula is:

  • Monthly payment (P) = A * [ i (1+i)^n] / {[(1+i)^n]-1}

For example, if you want to take an amortized loan of £60,000 over a period of 10 years at 6% annual interest rate, your monthly payment is calculated as following:

Inputs are:

  • A= 60,000
  • i = 0.005 (6%/12 months)
  • n = 120 (10 years * 12 months per year)

Payment formula is:

  • P = 60,000 * [0.005(1+0.005)^120] / { [(1+0.005)^120]-1 } = 60,000 * 0.01110205019 = £12

Interest payment = i * A = 0.005 * 60,000 = £300. So, the portion of the principle that would be paid at the first month will be 666.12 – 300 = £366.12

 

Interest only loans

According to interest only loans, you will delegate the payment of the total principle amount to the end of the loan period. So, you will be asked to pay only interest amounts every month.

If we apply this to the previous example, you will only apply a simple formula to calculate monthly interest payment as following:

Interest payment = i * A = 0.005 * 60,000 = £300. You will pay £300 monthly for 120 times until the end of the loan period, then you will pay the £60,000 in full.

 

Interest on credit cards

 

If you want to take a loan that is not too big, you can use your credit card as an alternative option. But, you should know that this loan should be paid back as soon as possible otherwise you will have additional interest if your credit balance is increased.

Your bank will determine a minimum monthly payment amount that is a fixed amount of £30 for example or 1% of your credit balance, which is bigger. For example, if you want to take £8,000, the minimum monthly payment will be calculated as following:

  • Fixed amount = £30
  • 1% of credit balance = 1% * 8,000 = £80

So, the bigger amount (£80) will be your monthly payment. If you paid less than this amount, you may be exposed to penalties or late fees. However, it’s more recommended to pay more than the minimum monthly payment because your charged interest per month will increase your credit balance which in turns will increase your minimum monthly payment.

For example, if the annual percentage rate (APR) that is applied on your credit card is 18%, your monthly interest charges will be calculated as following:

Monthly interest charge = (18%/12) * 8,000 = £120 which is more than the minimum monthly payment. The difference between your monthly paid amount and your monthly interest charges will be added to your credit balance. So, if you paid £90 for example, your new credit balance will be as following:

New credit balance = 8000 + (120 – 90) = £8030

 

Interest rates and factors to consider

 

Interest rate is the fee of using money of the bank, that’s how it make profits. This rate is not fixed on all loans, it depends on different factors that either increase or decrease that rate. These factors include the following:

 

The principle amount

It is the amount of money you want to borrow from the bank, but it should be better described as the amount of money you are able to pay them back after considering your annual, monthly, or weekly income, your regular expenses, and any financial issues that could face you in life.

 

Repayment schedule

There are many repayment options you can choose from, you can pay weekly, monthly, or fortnightly. But, you should make sure that your budget and sources of income will match your chosen option. For example, if you choose to pay weekly, your budget should be ready for that. Regarding interest rate, it will be lower when you make more repayments. So, the weekly option is the most money-saving repayment schedule.

 

The period of the loan

Short term loans usually require more monthly payments than long term loans. But, they ask for lower interest amounts than long term loans do. for example, if you take a loan of £30,000 with two options, either to repay it over 3 years or 6 years. Interest could be calculated as following:

Over 3 years: interest rate could be 15%, monthly interest = 15%/12 * 30,000 = £375, the overall interest amount over the 3 years will be £13,500

Over 6 years:interest rate could be 10%, monthly interest = 10%/12 * 30,000 = £250, the overall interest amount over the 6 years will be £18,000

 

Best banks for personal loans

In UK, there are many great banks that have established their names as the greatest Banks in UK and sometimes outside the UK. Buy, when it comes to getting a personal loan, the most important thing to think about is the interest rate you will be charged for. Personal loans are usually repays over a period from 1 year to 5 years. So, we will focus on banks that offer the cheapest interest rates for loans that are repaid over 3 years as an average period.

 

 

Tesco Bank

A small personal loan from Tesco Bank would charge you 3.5% interest rate, you will be allowed to borrow from £5000 to £7499. The rate is lower for medium loans that are from £7500 to £15000 and for large loans that land between£15000 and £25000, it is 2.9% to encourage more lenders to focus on this range. But if you are going for a loan that exceeds £25,000, Tesco would charge 6% interest rate and this still a cheap rate for larger loans.

 

M&S Bank

M&S is another bank that provides the lowest possible rates for UK borrowers, it offers a rate of 2.9% for personal loans that start from £7500 just like Tesco Bank. But, it asks for a higher rate for lower loans. From £5000 to £7499, the interest rate would be 3.6%.

 

Sainsbury's Bank

This bank offers a fixed and encouraging interest rate for those who are willing to take a loan from £5000 to £25000 or more. The rate is 2.9% for a period from 2 years to 5 years.

 

Yorkshire Bank

The interest rate in Yorkshire Bank is a little bit similar to that in Tesco bank. It is 3.5% for loans from £5000 to £7499, then falls to 2.9% for loans from £7500 to £15000, then rises again to be 3% for loans from £20000 to £25000.