How to calculate the loan interest rate?
The loan involves many fees, the most important of which is its interest rate. We advise how to calculate the interest rate on a loan and explain what costs should be taken into account
Interest is not everything
Interest is only the beginning of “credit fees”. In addition to him, we must count among others with commission, interest, monthly installments and insurance. The commission is a fee that the bank will charge for granting us a loan. We will feel it most strongly when we take a loan with a short repayment date. Even if a bank offers a commission-free loan, it is likely that the lack of it will “reflect” in the form of, for example, the need to purchase other products. Before we decide, let’s check whether we won’t pay more for the credit card or the use of a personal account than for the commission. If the bank allows us to choose between an equal and decreasing installment, let ‘
The total cost of the commitment is the sum that will go to the creditor’s account. The final loan cost is influenced by, among others how much we take it. The longer the loan period, the higher the interest rate. On the other hand: a loan that we repay quickly means a higher monthly installment and a high commission.
Let’s go back to the interest rate. When taking a loan, we can choose a fixed or variable interest rate. The first of these is usually offered for short-term liabilities and does not change over the entire duration of the contract. The second depends on the interest rate fluctuations currently in force on the market. The variable interest rate consists of the margin and WIBOR indicator. It will apply until the bank sends us a new repayment schedule. The conditions related to the new interest rate will be included in the contract.
Credit cost and selected installments
Interest is the significant cost of credit. They are the lower, the lower the interest rate on our liability. Their amount is proportional to the interest rate and repayment length. The interest rate is given annually, while the installments are paid monthly. This method of presenting interest is standard practice. It applies not only to loans, but also to deposits, overdue payments, etc. The installment is nothing else but the loan amount that we give back every month.
How does the bank calculate interest? First, it determines what part of the loan we still have to pay. Then, it accrues interest on this capital, taking into account the annual interest rate and the number of days in a given month. This in turn means that in February the interest will amount to us more than in the longer months. For the purposes of calculations made by the bank, it is assumed that the year has 365 days.
Equal or decreasing installment – which is cheaper?
The loan may be repaid in the form of annuity or decreasing installments. The main difference between these types of installments is that they are fixed in equal installments. It is different with decreasing installments, where the amount of capital repaid every month is fixed. Each installment consists of interest and principal parts. The former involves interest, the latter applies to how much we borrowed.
The amount of the annuity installment already contains the sum of interest calculated in a given month and the “rest” is just capital. In the shorter months, the capital part will be larger than in the longer months. An equal installment is a guarantee that we will pay the same amount every month. The exception is the last (equalizing) installment, the amount of which may differ from the others. The capital part is low at the beginning and increases with the passage of time. Proposal? Choosing equal installments for a long time we pay only interest. The repayment amount is steadily decreasing, and hence lower interest rates. What does not change is the installment amount.
However, with decreasing installments, interest will be added to the fixed amount of capital, repaid every month. As the name suggests – the amount of outstanding capital decreases, interest and installment decrease.
If we took a mortgage, we should remember that this bank product has a variable interest rate. Its amount depends on the WIBOR or LIBOR market rates. During the term of the contract, the bank periodically updates the interest rate and sends a new repayment schedule.
How do you calculate the loan interest rate?
To calculate the interest rate on the loan we will need such data as:
- amount of credit
- annual interest rate (interest rate plus bank margin)
- number of installments to be repaid
- credit period, ie for how long we take the loan
- monthly installment amount
- total amount to be repaid.
If you want to calculate how much you pay for the loan, you should also consider the additional fees. They include, among others preparatory or administrative fee. It may also be necessary to insure the loan or to provide additional insurance if we lack the means for own contribution. If we know the amount of additional costs, we sum them up and divide them by the number of installments. The result that we obtain must be added to the amount of the monthly installment. This is how much we will transfer to the bank’s account monthly.
In the network we will find calculators that will allow us to calculate how much our loan costs. Some people approach such tools from a distance, fearing that the information presented has nothing to do with the current offer of banks. However, it is difficult to talk about distortion here, although the banks’ calculations may differ from what the calculator shows us. To calculate how much our loan costs, we provide the amount that interests us, interest rate, loan period and possibly a margin. However, you should approach the result with distance, because it is only indicative.
How much does the loan cost?
How much we pay for the financial support provided by the bank is influenced by factors such as:
- number of installments – the more installments we spread our commitment, the lower they will be
- installment type – equal or decreasing
- interest rate
- type of interest – fixed or variable
- loan period
- amount of credit
- the amount and manner of paying the commission – it can be included in the total amount of the loan or added to it.
How do you calculate the loan interest rate? Summary
Calculating the loan interest rate yourself is quite difficult. It’s easy to make a mistake and accidentally skip some fees. If you do not want to do it “on your own” use the loan calculators. Remember that with an annuit installment you will pay exactly the same amount each month. Installments decreasing at the beginning will significantly reduce our budget, but over time they will be less and less noticeable. If you want to calculate the interest rate on your loan, you should contact the bank and seek the help of specialists. The bank is required to provide us with a loan simulation which will take into account all related costs, in which case we will be sure that the calculations made are correct.