We never know when a situation of emergency might come into our lives. Most of the time, it comes with the increased urgency and demand for funds.
However, it isn’t always possible to have enough savings or have enough time to wait for the next paycheck, which is why people sought after taking instant payday loans or more from banks and other financial institutions.
Now, loans are not something that can be paid fully at once. It is taken for a particular period of time with interest charges being added over every installment. Calculation of the actual amount to pay, while keeping in mind the number of installments, rate of interest, and principal loan amount, can be a tricky job.
If you’re considering a debt payment plan for your installment loan, there are a few things that you need to keep in mind. In this article, we’ll outline the three most common methods for calculating installment loan payments, and provide some tips on how to choose the one that’s right for you. For the quickest solution, you can use the free installment loan calculator by FlashApply.com.
What are the Terms of an Installment Loan?
While purchasing a car, you can borrow a small business equipment loan, or simply for medical treatment. The terms of the loan will affect how often you need to pay it, how much you are required to pay each month, and what interest rates you are charged.
The most common type of loan is a variable-rate loan. This means the interest rate changes over time, based on a gauge that is set by the bank or credit union. Although this means that the rate of interest will change as long as the loan exists, it will not bind you to a certain period of time. This is usually good for people who are not sure when they will be able to pay off the loan.
Fixed-rate loans are typically better for people who know they will be able to pay off the loan within a certain time period. Generally known as installment loans, these have an interest rate that stays the same throughout the entire loan term. But the only downfall of these term loans is they must be repaid in a certain period of time as per the loan plan. This can be good if you have a fixed income and do not want to worry about fluctuations in interest rates.
Some lenders also offer hybrid loans, which combine features of both fixed and variable-rate loans. This allows you to have more control over your monthly payments, while still having access to low interest rates.
What are Three Ways to Calculate an Installment Loan Payment?
Calculating a loan installment amount and total payment is no different from what you learned in your school. Before going into the formula to calculate an installment loan payment, let’s take a brief look at the terms as well.
- Loan amount:- This is the actual amount of money that one borrows from any bank, community or a particular moneylender. This is the base value on which the rate of interest and installment amount is to be calculated.
- Interest Rate:- This is a specific rate at which interest is to be applied on the borrowed amount. The rate of interest can commonly range from 5% to 24% of the principal value. The calculation of interest amount differs on the type of interest applied.
Simple interest is always calculated on the base value of the loan. But at times it is possible that the borrower isn’t able to pay the interest for once, then the amount gets added to the principal value. Compound interest is when the interest rate is applied to the sum of the loan amount and previously outstanding interests.
- Installment: This is the sum that the borrower is obliged to pay every month as per the loan plan. This included a part of the base amount along with the interest for that particular month. The no. of installments depends on the duration of the loan, which can be divided by the borrower at the time of borrowing.
- Total Payment: The total payment amount is the actual sum of money that the borrower pays in the overall period of the loan. It includes the loan amount and the total interest applied to it.
There are three common ways to calculate an installment loan payment: using the interest rate, using the principal amount, and using the total payments.
- To calculate the payment using the interest rate, take the principal amount and divide it by the interest rate. Then multiply that number by the monthly installment amount. For example, if someone borrows $10,000 at 8% interest and makes 12 monthly payments of $100, their payment would be $872.12 ($10,000 ÷ $100 = .08).
- To calculate the payment using the principal amount, take the principal amount and divide it by the interest rate. Then multiply that number by the monthly installment amount. For example, if someone borrows $10,000 at 8% interest and makes 12 monthly payments of $100, their payment would be $880.48 ($10,000 ÷ .08 = $880.48).
- To calculate the payment using the total payments method, add all the monthly installment amounts together and divide that number by 12. For example, if someone borrows $10,000 at 8% interest and makes 12 monthly payments of $100, their payment would be $1,072.96.
Conclusion
In this article, we discussed three methods that can be used to calculate an installment loan payment. After going through all of them, we bet you’ll never face any trouble while calculating the loan amount.
These calculations will help you determine the amount of money that needs to be borrowed, the interest rate that will apply, and when the loan should be paid off. You can also go for a website offering a simple loan calculator to help you with the process. Armed with this information, you can begin the process of getting an installment loan and making some important financial decisions.
