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How Much Of Your Monthly Payment Is Interest?
Loan interest adds up.
Do know how much interest you’re paying?
Whether your loan is a mortgage, auto loan, business loan, or any other type of loan, it’s important to understand how much you’re being charged for borrowing money.
This Loan Interest Calculator makes it easy to discover how much of your monthly payment is interest, and will even reveal your total interest cost over the life of the loan.
Read on to explore the concept of interest and how you can get the best deal…
What Is Interest?
Interest represents the time value of money. It is paid regularly at a particular rate for the use of money lent, or for delaying the repayment of your debt.
Interest is calculated as a percentage of the money owed and is usually charged annually. Before you take a loan from a lender you’ll want to know how the interest is calculated and applied to your loan amortization.
Who Sets The Interest Rate?
The central bank sets short-term interest rates, but market forces determine long-term interest rates based on economic conditions.
Interest rates tend to go down if the economy is suffering and rise during robust, overheated economies. Consumers usually won’t take loans if the economy is down because of fear they won’t be able to make the payments. Therefore, the demand for money will be less. This is why the central bank lowers interest rates in these conditions. The goal is to stimulate business activity by lowering the cost of borrowing money to finance business expansion.
On the other hand, if the economy is doing well, the demand for loans goes up causing the price of money (interest rates) to rise. When the interest rate rises high enough it tends to reduce borrowing which serves to choke off economic expansion.
When And How Interest Is Charged?
Interest is charged on mortgages, credit cards, unpaid bills, business loans, personal loans, auto loans – basically, any type of financial borrowing. Lenders will charge different interest rates for different types of borrowing depending on credit worthiness and the security of the loan. Personal loans, credit cards, and unsecured loans are usually charged higher interest rates since they are riskier resulting in higher default rates.
It’s crucial to understand how interest rates are calculated before you sign up for a loan. Fortunately, this loan interest calculator makes the math easy.
How To Get Low Interest Rates On Loans
What can you do to get a low interest rate on a loan? The best strategy is to improve your credit rating. Generally, the higher your credit rating, the lower the interest rate you’ll have to pay.
With that said, below are some additional tips to help you get the lowest interest rate on your next loan:
- Shop around – Calculate how much you can afford to pay each month and find the rate that fits your budget.
- Negotiate the interest rate with your lender – If you have a good credit rating, your lender may be willing to lower your interest rate. Alternatively, you could refinance your existing loan to a new lender at a lower rate.
- Pay your other debts promptly to maintain a good credit rating – Lingering debt can hurt your credit rating. Make sure you make your payments on time.
- Understand the different types of interest rates and how they are calculated – Use the Loan Interest Calculator to determine how much interest you will be paying for your loan and compare the results with other lenders.
Interest rates aren’t the only important consideration. There’s one more tip that can dramatically reduce your total interest cost . . . .
Make Extra Payments On Your Loan
The more money you owe, the more you pay in interest.
To avoid paying so much interest on loans, it is best to make extra payments when you can. The more principal you pay now, the less interest you’ll have to pay going forward. Making additional principal payments with your regular monthly payment can shorten your loan by years and can save you thousands of dollars in interest.
If you’re interested in making extra payments on your loans, try our Debt Snowball Calculator.
This Loan Interest Calculator provides a great wake-up call to pay off your debt as soon as possible. Many borrowers don’t realize the total interest cost of their loans.
Try out the calculator and weigh your options. Are there other loans that might work better for you? Can you avoid loans altogether?
Armed with the results of the Loan Interest Calculator, you can make a more informed decision regarding how you spend your money.
Loan Interest Calculator Terms & Definitions
- Principal – Denoting an original sum invested or lent.
- (Loan) Interest – Money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt.
- Interest Rate – The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.
- Term – The duration of the loan.
- Monthly Payment Amount – The dollar amount due each month to repay the credit agreement.
- Total Years Until Loan Payoff – The number of years until the loan will be paid in full.
- Loan Balance – The total amount that needs to be paid off (amount still owed).
- Lender – An organization or person that lends money, usually to make money through interest.
- Borrower – An organization or person that borrows money, usually having to pay interest.
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