Working Out The Total Cost Of A Loan
Monday, November 13, 2006
When you are looking for a loan, you need to compare loans by
working out the total cost of repaying the loan. Although many
web sites allow you to compare the APR costs, working out the
real total cost of a loan is a little more complicated.
However, it is important that you do this so that you can
budget accurately and also so that you can find the best deal
for your needs.
Estimating the total cost
The quickest and easiest way to estimate the total cost is to
multiply the total amount borrowed by the APR, and then
multiply this by the number of years. For example, if you
borrow £10,000 and the APR is 10% for 5 years, then 10000 times
0.10 times 5 equals £5000. This is the interest you will pay, so
add this to the total amount borrowed and then you know to
borrow £10,000 for 5 years at 10% costs you £15,000 in total.
Of course, this is only an estimate and will be higher than the
actual amount as interest payments are reduced as you pay off
the amount.
Other costs
There are obviously other costs to add to this total amount,
such as loan processing fees, payment protection insurance and
any other fees you need to buy to set up the loan. Add these to
the total cost mentioned before and you have the total that you
need to pay back over the loan term.
TAR
If you are discussing the total cost of the loan with your
lender, then ask them to give you the TAR. This stands for
Total Amount Repayable, and will let you know the total you
have to pay back during the loan term. The difference between
the amount borrowed and the TAR will tell you how much the loan
is costing. A smaller difference between these two numbers means
a better deal for you.
APR
As well as knowing the TAR, you should work out how much you
need to repay each month. To do this, divide the TAR by the
total loan term in months. For example, if you were paying back
£14,400 over 12 years, then you will pay back about £100 a month
(14,400 divided by 144 months). Of course, this is also an
estimate as the TAR amount you have calculated is an estimate.
To get the exact amount, ask the lender.
Adding penalty costs
When working out the total cost of a loan, you should budget
into the equation some penalty fees. Although you might never
pay any of these fees, to allow for a few late payments will
help you to be prepared in case. It may also help you to decide
between two similar loans, depending on the amount they charge
for penalties and late fees.
If you are unsure, seek advice
If you are looking for a loan and are still unsure how much you
will need to pay back over the whole term, then consult an
independent financial advisor, who can help you work out how
much you are paying for each loan, and which is the best deal.
About The Author: Peter Kenny is a writer for
http://thriftyscot.co.uk, please visit us at
http://www.loanwize.co.uk and
http://www.thriftyscot.co.uk/Loans/
posted by Dennis Cheesman @ 5:48 AM,
