Personal Loan Interest Calculations

Better Credit History, Better Rates

Personal loans are a great, small-dollar option for situations when you need funds for short-term issues. Whether it’s a pile of medical bills or car trouble, when the need arrives, it is important that your cash loan be quick and easy to access. For many of us, it can be hard to determine what is an affordable rate of interest for a personal unsecured loan. To help clarify the best interest rates, we’re going to take a look at a basic example of personal loan interest.

Most personal loans have an interest rate between 12% and 24%. Depending on the borrower’s credit history and other qualifications, the lender can adjust the interest rate up or down to fit the situation. Generally speaking, a better credit history will result in a lower interest rate on the loan, whereas a credit history with past due payments, previous defaults, and collections will often lead to a higher interest rat, to offset the lender’s increased risk in offering credit to a borrower with poor credit.

Let’s Run Some Hypothetical Numbers

Let’s say you need a loan, for $1,200, and you want to have it paid back in full after 3 months.

First off, we need to establish some common financial loan terms so that you can navigate all of the lender’s fine print when shopping for the right loan.

You know you need $1,200. This is called the principal, or the amount you are looking to borrow.

You want to finish repaying the loan at the end of 3 months. This is called your loan term.

Interest is the extra money your lender will charge in order to service the loan; it is basically their profit. It’s what makes the situation worthwhile for them to take a chance lending you money. This interest is calculated as a percent of your principal. There are different ways that this interest can be calculated, including simple and compound interest, but generally speaking, most retail loans will be compounding loans.

Lets Crunch The Numbers

et’s assume you found a lender who is offering you the loan of $1,200 with a mid-range interest rate of 18%, compounded monthly, for a term of 3 months.

This means that at the end of Month 1, you will owe $472. That is $400 (1/3 of your principal), and 18% interest on that $400.

After you make that first payment, your remaining principal will be $800. Your second payment will be due at the end of the Month 2, and you will again owe $472. That is $400 from your principal, and another 18% interest on that amount.

At the end of Month 3, you will have one final payment of $472. That is the remaining $400 from your principal loan amount, and one last interest charge from your 18% interest rate.

All together, on that $1,200 loan, you paid out $216 in interest. Double-check the math, and 18% of $1,200 is….

$216.

$72 three times is also $216.

$472 three times is $1416, which is the same as $1200 + $216.

Don’t Fear The Interest!

So, essentially, no matter how it breaks down, or how your payments are structured, when you run the math

 on your loan, your interest should always come out the same at all levels – by payment, and as a whole. If it is not, something may be a little wrong with the way your lender is structuring your interest rate or interest payments, and needs to be examined more thoroughly. So, find a trusted lender, and don’t fear the interest!