Hi Skint pals,
What do you do when your loan statements come in, for your car payments or whatever? Hide behind the sofa? Stuff the envelope straight in the recycling? Or pore over it, attempting to understand APR and all those figures that somehow take your original paltry spend and turn it into something way bigger? If you want to understand just how your loan stacks up, today’s sponsored guest post from debtsettlement.com might help.
Most people understand how loan interest works, at least a little bit. You borrow a certain amount of money and you repay it over a certain amount of time. And, in that certain amount of time, you’ll pay extra interest to the bank for the convenience of borrowing their money.
The interest rate on a loan is typically set based on your credit worthiness. If you’re a risky borrower and the lender thinks you might not pay back the loan, you’ll have a higher interest rate. And, if you’re deemed a reliable borrower, your interest rate will be lower. Here’s how the maths stacks up when it comes to repaying money borrowed:
Loan Payment Example
Do you know how much you’ll repay in interest over the course of a loan? It can be eye watering. For example, if you have a £10,000 loan at a 13% interest rate with a monthly payment of £300, you’ll pay about £2,600 in interest by the time the loan is completely repaid. Many people simply send the £300 payment as the lender instructed, never questioning the amount or thinking about how much extra they’re paying over the life of their loan.
Have you ever wondered what would be the impact of paying off your loan in bigger chunks? The difference of repaying interest earlycould be huge. Say for instance, you could increase your monthly payment by another £50. By paying off the loan slightly faster, you would reduce the overall amount of interest to £2,250 – a saving of £350 over the life of the loan. And of course the more you can pay each month, the more you’ll save.
Paying the debt off faster will shave interest off the debt. Plus, the sooner you can pay off your loan, the sooner you free up that monthly cash, allowing you to use the money for something else, like padding your emergency fund or saving up for retirement.
Calculate Your Own Loan Repayment
Now, how can you recalculate your own loan repayment? Sure, it’s fancy maths but there are simple online tools available to help you do the calculations. For example, the credit card repayment calculator at Credit Geeks allows you to input details about your loan (or credit card), then play around with different numbers to test out the impact of increasing your monthly payment.
Just put in your current balance and interest rate. Then, you can choose to enter your monthly payment amount or the number of months you want to spend paying the debt. If you input your monthly payment amount, the calculator shows how long it will take to pay off your balance, and the total amount you’ll end up paying.
Or, if you enter the number of months you want to spend paying the debt, the calculator shows you the monthly payment required to meet that goal. For example, consider the £10,000 loan from above. To pay off this loan in 30 months, you’d have to pay £392.22 each month, as opposed to the £300 in the example above. Over the course of the loan you’d pay a total of £11,767, saving yourself over £800 in interest on the figures above!
So, when looking at paying off a loan it’s always worthwhile considering if you can pay a bit more. Look at your monthly budget to figure out how much extra you can put toward your debt, then use the Credit Geeks calculator to see how much you can save by paying your debt just that bit faster!
This post was written by Eliza Collins, a personal finance writer specializing in savings strategies, alternative income and debt relief options. You can read more of her articles at the debtsettlement.com blog.