What is a loan calculator and how do I use it?

Jay Kanjere

Have you ever found yourself in a situation where you needed a loan immediately but thought it would take you ages to pay it all back? Try a loan calculator.

When times are tough and you are not earning as much as is needed to cover your expenses, you may consider taking out a loan. In this day and age, it is important that you familiarise yourself with certain financial aids that can help you out of a sticky situation. It is important however, to consider all terms and conditions of the loan before jumping right in with both feet.

A good place to start is with the terms used and what they entail when you take out a loan. The “Principal” amount is the initial amount of money that is borrowed, before considering interest payments. The “Interest” amount is what has been added for the convenience of “borrowed money”.

Loan calculators  are available online and allows you to calculate  the best possible scenario when applying for a loan through use of certain variables such as interest rate. Information such as the amount of money you would like to borrow, preferred interest rate, payback period, and the date of when you intend to commence with repayments are noted as the variables. This naturally allows you to calculate many different results accordingly.

Loan calculators are useful for calculating loan repayments such as university loans, car loans and long-term loans such as mortgages, and what is even better, you did not even have to leave the comfort of your home to access all relevant information.

Loan calculators are equated to simple calculators that perform the very basic of functions, as well as more complex loan calculators that calculates loans with both compounding and payment frequencies that do not coincide. The purpose of loan calculator is thus to help you prepare for a loan by finding out the total amount to be repaid as well as your monthly payments so that you are never left unaware.

There are however some snags to using a loan calculator as some may work on the assumption that interest rates will remain unchanged for the entire duration of the loan.

In the case of a mortgage loan, this is true for fixed rate mortgage but not adjustable rate mortgages. Adjustable rate mortgages usually have low  initial interest rates which steadily rise and may become higher than the rates charged for comparable fixed-rate loans.

You also need to take note of the fact that some loan calculators also work on the assumption that the loan repayments will be made out in equal monthly payments. This is true for some cases, but not for all.

If you are going to take a loan such as a mortgage, you will need to use an “Amortization calculator” which differentiates between the amount of money that is paid for the interest and the amount of money that is paid towards the principal amount. Other loan calculators lump these two figures into one amount.

Amortization is the payment of debt in fixed and regular installments over a period of time, usually in the case of paying off a car or the mortgage on one’s house. During the early stages of loan repayments, a large proportion of the money goes towards interest and the remainder goes to principal payments.

With the passing of time, larger amounts of money will be allocated towards principal payments and a lesser amount for interest payments. The Amortization Payment Schedule determines these respective percentages for every payment.

The Amortization Schedule Calculator can also be used when paying off student loans or credit card debt.

When making use of loan calculators, it is very important to pay attention to the finer details and ensure that you are entering information that is both truthful and accurate. The strength and reliability of the calculator’s output is centred around all details entered which is why it is important to be as accurate as possible. 

And as the phrase “garbage in, garbage out”goes; incorrect or poor-quality input will undoubtedly produce faulty and unreliable output. 

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