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How To Calculate The Impact And Real Cost Of Your Loans

Gentleman calculating loan costs with a pen, paper and calculator

Learning how to calculate loan repayments can seem daunting at first. It can be (or at least seem) annoyingly complicated because you don’t only take out a loan, you also take out the interest

Regardless of your maths skills or lack thereof, knowing how your repayment options are calculated is good for you and your financial decision making. So you will never be faced with surprises or penny-pinching moments, as you borrow only what you can afford. Choosing the best option for you can also help you to make repayments easier, which can help build your credit record.

Let’s crunch the numbers and dive into the finances of your repayment options so that you know what you owe.


How personal loan payments work

In a personal loan, someone or an organisation (banks, for example), lends money for a small fee (expressed as a percentage interest rate). Therefore, personal loans are obtained when a consumer (the debtor) borrows a large sum of money from an institute (the creditor) for a personal purchase.

Generally, your loan’s principal amount is not the only thing you’re responsible for. You’re also liable for the interest and fees associated with it. The costs are divided into:

  • Principal: The amount that you borrow, which goes into your account.
  • Interest: The amount a lender charges you for a loan. An annual percentage rate (APR) combines your interest rate and up-front fees. The interest rate on most personal loans is fixed, so your monthly payment won’t change during the loan’s term. 
  • Fees: Taking out a loan comes with additional costs, which include origination fees, late fees, insufficient funds fees, and more.


Interest-only loan or an amortised loan?

Do you intend to take out an interest-only loan or an amortised loan? Having this knowledge allows you to figure out how to calculate loan repayments.

Interest-only loan

An interest-only loan requires you to only pay the interest during the first few years, and not to pay anything toward the loan’s principal. Eventually, you will have to pay off the entire loan with a lump-sum payment or with a higher payment per month. If finances are tight, people may opt for a loan like this to buy an expensive home, have greater cash flexibility, or to keep initial costs lower.

Amortised loan

The interest and principal of the amortised loan are included over a set period of time. To put it another way, an amortised loan term requires the borrower to make scheduled, periodic payments that apply both to the principal and to the interest.

Check to see if you qualify to reduce your debt instalment with our quick quiz

Simple loan calculation formula

Depending on the type of loan you have, you need to use a different type of loan calculator to determine your monthly payments. So, let’s figure it out together.

How to calculate amortised loan repayments

Every month, the principal and interest of your loan are credited to the principal balance. Here’s how you would calculate loan repayments on your new loan. To keep it simple, let’s assume you are given a R10,000 auto loan at a 7.5% interest rate for five years after making a R1,000 down payment. Here’s the equation you need to solve:

A = P (r (1+r)^n) / ( (1+r)^n -1 )

In case you need a refresher, brackets
() imply multiplication with the sum of the contents of the bracket, a forward slash / represents division, and the ^ symbol indicates: to the power of.


Most built-in mobile calculators today allow us to enter this formula.Here are the instructions for accessing your scientific calculator on iPhone and Android.

  • A = Payment amount per period
  • P = Initial principal or loan amount
  • r = Interest rate per period 
  • n = Total number of payments or periods


Your numbers would come out as follows:

  • P = R10,000
  • r = 7.5% per year / 12 months = 0.625% per period
  • n = 5 years x 12 months = 60 total periods


When you do the maths, the monthly payment will look like this:

10,000 (.00625 x (1.00625^60) / ((1.00625^60) – 1)

10,000 (.00625 x 1.45329) / (1.45329 – 1)

10,000 (.00908306 / .45329)

10,000 (.02003808) = R200.38


Therefore, your monthly car loan payment will be R200.38. however, as you repay your loan, a great portion will go toward the principal balance, while interest expenses decrease


How to calculate monthly interest-only loan repayments

For an interest-only loan, you will only be responsible for paying the interest for a set period. During that period, the principal you owe will remain the same.


As an example, let’s assume that you are borrowing R10,000 with an APR of 6% and a 10 year repayment period. To calculate interest rates in this case, multiply the amount you borrowed by the interest rate. By dividing your annual interest costs by 12, you can get the following figure:

  • R10,000 x 0.06 = R600 in interest each year
  • R600 divided by 12 months = R50 in interest per month

Loans that you can calculate

Loans are governed by different requirements, and the following are considered as the easiest to calculate: 


Personal loans

You can use a personal loan calculator to determine your total monthly payment amount based on your principal balance, interest rate, and repayment period length.


Student loans

Using this student loan calculator, you can determine how much you need to pay each month to pay off your student debt early based on your loan amount, interest rate, and loan terms.


Traditional fixed-rate mortgage

With a home equity loan calculator, you can find out how much you can borrow before applying for the loan. The amount of your home equity that you can borrow through a home equity loan is influenced largely by your available equity, but your credit score also has a big effect on your loan and the interest rate total.

Auto loan 

When using this auto loan calculator, you will be asked for the loan amount, repayment term, interest rate, and whether a new or used car is wanted.


How to work out the real impact of your loans

Calculating the true cost of your loans requires that you consider the following:

  • The amount of money you want to take as a loan. 
  • The rate of interest.
  • The cost of all the fees that you might need to pay.
  • The frequency of repayments (weekly, monthly, or something else)
  • The time period you’ve agreed to repay what you borrow.


Knowing what you’ll owe is extremely important, and can help you to avoid one of the common mistakes people make when repaying debt, which is not having a plan to pay off the debt.


Coming to terms with loan costs and making a decision 

When considering a loan, it can seem overwhelming or scary given all the details and calculations. That is why being prepared with useful information and understanding your monthly payments, and your budget is important.

If you feel like you might be in hot water after doing your existing loan repayment calculations, then take a moment to learn how debt review could help you to get you out of your debts (if necessary).

Taking out a loan is necessary from time to time, but it can be very helpful to do your homework beforehand to make sure that you’re in a position to repay the loan before taking it out. Now you know how to calculate monthly instalments for a variety of loans.

Do you know whether you qualify?

Find out if you’re eligible to reduce your debt and protect your belongings.

Disclaimer: This website and any information herein is not intended to be, nor does it constitute, financial, tax, legal, investment, credit, or other advice. Before making any decision or taking any action regarding your finances, you should consult a qualified professional directly.

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