3 Effective methods to calculate the total cost of a loan

Home Collection Loans

The money you borrow is not the same in the amount that you pay back at the end of the tenure. It is always bigger than what you take at the time of approval. This is applicable to any type of loan product. So many factors come under consideration, as they all are decisive. You should not miss any one of them and try to get them in a queue to know how much burden your pocket will bear.

Here are the three methods that are in use nowadays. Know about them and then you can make your own calculations while playing with the numbers you will borrow through a loan.

Elements that decide the aggregate price of a loan

Before you know the methods, it is better to know the important aspects that are unavoidable in the calculation of the total cost.

  • The amount of the loan
  • The cost of fees (if any)
  • The tenure length
  • The Annual Percentage Rate

These basic details can tell you a lot about the impact of debt on your finances.

Now, comes the turn of the actual actors that help to determine what maximum amount you will pay on a loan.

1 . Use a basic loan calculator

No calculation can complete without the calculators. You need to bring them in use; they are the advanced financial tools that tell the actual price of a financial commitment. Add several basic details like loan amount, tenure, interest rate and click on the ‘calculate’ option and you will get monthly as well as complete cost. There are varied types of user-friendly loan calculators available on the internet. Download them on your mobile and use effortlessly.

  • The basic format that loan calculators have –

Here is how most of the advanced calculators look. The required information is also there.

basic loan

 2. Create a spreadsheet for a detailed idea

On Microsoft Excel or Google Sheets, you can figure out the cost part with detail. Not only you can calculate the total money you pay at the end of the tenure but also the yearly cost. THE SPREADSHEET SOFTWARE PROGRAMS HAVE MANY FORMULAS FOR BASIC CALCULATIONS. However, to use the spreadsheet method, you need to learn the skills on how to apply a formula.

3. Calculate through APR by applying a formula

APR means the Annual Percentage Rate calculates the annual cost of a loan. If your tenure is 3 years, by knowing the price for one year, you can easily find out the total cost. This method is usually applicable to short-term loans for instance – home collection loans, personal loans, bad credit loans etc.

Here is the formula that is given by the FCA to calculate APR.

home_1

K – Number that indicate a certain amount of credit

K’ – Number to indicate a particular instalment

A’k ’ – Amount of instalment K’

A k – Amount of advance of K

m’ – Total number of instalments

m – Number of advances of credit

t K’ – Interval expressed in years. It is between the relevant dates and the actual dates of instalments that are numbered in one to m’.

t K – Interval expressed in years on two points. 1) Between the relevant date and the precise date of second advance 2) any following number of advances three to m

The above three ways are precise and rational as they give near-to-perfect calculations. You can use any one method or all of the ways to calculate the overall cost. A small difference can be there and the total cost can be a bit big or small.

Knowing the future is a good habit for a peaceful financial life. By knowing the aggregate value, you can make a rational decision. Do you agree?

3 Effective methods to calculate the total cost of a loan

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