When you need cash, personal loans are the best option. As it offers affordable interest rates, and this money can be used for any purpose. However, you must understand how much a personal loan will cost you before you request a personal loan because, in the end, you have to pay the loan, and it is crucial to know the total cost you have to pay to the lender.
Three factors affect the cost of a loan, and you need to understand all three aspects to make the right decision. The three factors are:
1. The Interest Rate of the Loan
Interest is the cost stated in the form of a percentage of the money borrowed as a loan. For instance, if the interest rate is fixed at 10%, you have to pay 10% of the amount borrowed to the bank each year.
Hence, a loan with a high-interest rate will be costlier than a loan with a low-interest rate if you qualify for it. For example, a loan of $10,000 having a life of five years and an interest rate of 10% will cost you approximately $2,748.23 over the five-year period, which is $212.47 per month. On the contrary, the same amount of loan at 25% will be costlier. Thus, the total costs of the loan will be $7,610.79 over the life of the loan, paying $293.51 each month.
Interest rates vary from one lender to another. To find the best interest rates for your loan, get multiple quotations. A credit score is a key factor influencing your interest rates so make sure to have good credit scores before purchasing a personal loan. Credit scores affect your loan interest rate, which ultimately affects the cost of the loan.
2. The Borrowed Amount
Interest rate is the percentage of your borrowed amount. Hence, having a vast loan means the amount of interest will also be higher. Moreover, you have to repay the principal amount and interest each month. Hence, a high loan amount will result in increased monthly payments of the loan.
Considering the above example again, suppose you purchase a $20,000 loan instead of $10,000 at a 10% interest rate for a similar five-year period. Again, the monthly payment will be double from $212.47 to $424.94, increasing the total cost of a loan from $2,748.23 to $5,496.45.
This is why one should make confident decisions on the borrowed amount. It should be enough to fulfill your need and to avoid borrowing more than necessary.
3. The Timeline of Loan Repayment
Lastly, the period of the loan matters. The time required to pay the total loan affects the total cost of the loan and monthly payments. Lenders can stretch the timeline of the loan payments for a more extended period to make it more affordable. You will be reducing your monthly payments this way. But if you choose to stretch your monthly payments for many years, you are not reducing it but paying much more than the regular interest payments in the end.
Once more, let’s consider the above example. You borrow a loan of $10,000 at an interest rate of 10%; however, let’s assume you will repay the loan over ten years rather than five years. As a result, the monthly payments will reduce to $132.15, but the total cost of interest upsurge to $5,858.09.
Eventually, one must consider each of these three factors meticulously before purchasing a personal loan. To keep the loan cost down, try looking for a loan with a low-interest rate, a minimum borrowed loan that just rightly fulfills your need and for the shortest period you can afford. Also, compare multiple quotations of interest rate before borrowing.
