How can you use a loan calculator to compare loans and find the best possible deal for you? Here’s our guide to how these useful tools can help.
Loans, just like any financial product, can vary wildly in everything from the loan amount and repayment period to the APR and the other associated costs. Comparing loans on a like-for-like basis can be difficult for consumers who lack basic levels of financial literacy, leaving them with financial products that neither offer the best value nor are the most appropriate fit for their needs.
One tool some lenders and comparison sites provide to make it easier to compare things like loan amounts, repayment periods and the total cost of a loan is a loan calculator. An example of a simple loan calculator has been created by the South African online loan lender Wonga. It provides instant visibility of how the total cost of a loan changes in line with the loan amount and the repayment period.
So, how can you use a loan calculator to compare loans and find the best possible deal for you..?
How much can you borrow?
One of the benefits of a personal loan calculator is that it makes it very easy to see the potential borrowing amounts. However, not all borrowers will be able to qualify for every loan amount. The sum you can access will be influenced by your current financial situation and credit history.
It’s not until you actually make an application for a loan that you’ll know exactly how much you can borrow. At that point, the loan provider will take a closer look at your income and existing financial commitments and assess how much they think you’ll be able to comfortably repay. They’ll also take a look at your credit report to see whether you have a good track record of repaying the credit you’ve accessed on time.
All this information will be used to determine the maximum borrowing amount. Typically, personal loans range from around R5,000 all the way up to R400,000. If you want to borrow more than that, you’ll most likely have to consider a secured loan.
How do you calculate the repayments on a loan?
A loan calculator will do this for your instantaneously, but it’s important you understand how the loan repayments are derived. Every loan will have an annual percentage rate (APR) attached to it. The APR refers to the yearly interest that will be repayable on the loan. As the value of the loan increases, you’ll typically see the APR fall.
If you apply for a R60,000 loan with an APR of 10 percent which is repayable over 3 years, you’ll have to pay annual interest of R6,000 a year. If you divide that figure by 12, you’ll find your monthly interest repayments are R500. Multiplying that figure by the duration of the loan, in this case, 36 months, reveals that you’ll pay a total of R18,000 in interest over the duration of the loan. That means the total cost of the loan (assuming no additional fees apply) is R78,000, which is the original amount you borrowed plus the interest you’ll pay.
How to use a loan calculator
A loan calculator performs all of those calculations we’ve just done instantaneously. All you need to do is determine your loan amount and decide how long you can financially commit to paying it back. You’ll then be told how much each repayment will be and the total cost of the loan including interest and fees.
There are also loan calculators that can help you determine how much you can borrow. Just enter a monthly repayment amount you can comfortably afford to and how long you can make those repayments for. The loan calculator will then inform of your maximum loan amount.
Have you used a loan calculator to secure a competitive deal on a loan? Did you find the process beneficial? Please share your thoughts in the comments below.
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