How do I use a loan calculator?

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Many personal finance and loan website offer a loan calculator. These enable you to work out what you can afford to borrow. The reason it's important to do this is that you should never take out a loan that you are unsure of being able to pay back. So, working out what your monthly payments would be depending on the amount and length of loan is a very useful exercise.

Most loan calculators can serve two purposes. One is to tell you how much your monthly payments will be if you borrow a certain amount over a certain period, paying a certain interest rate. Some loan calculators will be on the product provider's website, so you won't be able to put in the interest rate, as they'll already have the products programmed into their system, so try a different calculator if you need that facilitaty. The other possible purpose for the loan calculator is to put in the amount you can afford to pay each month, and over how long a period, and possibly the interest rate, and you will be told how much you can afford to borrow.

Whichever one you use, you should start out by auditing yourself fully. Take your monthly income, minus all of the compulsory expenses that you have then subtract a percentage (10%) to give you leeway each month. The remaining amount will give you the absolute maximum that you can afford on loan repayments each month.

Then you can start to use a loan calculator. The next thing you should think about is how much that you need to borrow. What are you borrowing the money for? Many loan calculators will actually ask you this question, as it will help them to work out which product would be best for you (some will suggest an extension to your mortgage if you want to do home improvements). But you need to know as well. If you need £3000, you are likely to have to pay a higher interest rate than if you need £25000, and even more so if the £25000 is for home improvements and you can get an extension to your mortgage for it.

Once you have worked out how much you want to borrow, think about how long you want to take to pay it back. Paying it back over a longer period leads to lower monthly payments but also means that you pay more interest in total, so be careful. Also, how long do you want to have a debt hanging over your head for?

With the calculators that allow you to enter the interest rate, you can play around with that to see what the effect of different products would be on your monthly amount.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2008

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