Have you taken a personal loan to fund your new purchases? Is it a car, medical expense, home renovation, or education? The loan term may vary, but the fact stands still: the total interest rate you pay is growing each year. The larger your loan and the longer the repayment period, the bigger the price that falls on your shoulders.
What Is a Loan Prepayment Calculator?
A loan prepayment calculator is an online tool designed to help the current or potential borrowers to identify how much of total interest they can cut by making extra installments and shortening the total loan term. The information you will have to provide is the current loan balance, interest rate, loan term, current monthly payment, and an additional monthly payment that you are willing to consider.
By entering this data, you can analyze other things as well. For instance, how profitable making an extra payment on a monthly basis could be, how much more you should pay and, how it will affect the total borrowing term.
How Does It Work?
To get a better understanding of how the loan prepayment calculator works, take a look at this case. Brad is considering the idea of making extra payments each month to cover his personal loan, save on interest, and take a mortgage for his dream house.
His amount of loan equals $40,000. Interest rate: 4 percent. Loan term: 10 years and monthly payments of $500. Additional monthly installments that he could make amount to $200.
The results show the impact and changes that can occur from making these extra payments. For Brad, the total interest will drop from $6,600 to $4,449. The total payments will decrease from $46,600 to $44,449. The change in total payment will amount to 5 percent or $2,151. He will also be able to repay his loan 30 months earlier than expected initially.
Advantages and Disadvantages
If your loan is flexible and allows for a certain degree of amortization, the calculator will help to optimize the finances and develop the best strategy to minimize the costs. On top of that, making extra installments will affect the debt-to-income ratio, which is directly linked to high chances of getting another loan on best conditions without high-interest rates often associated with the bad credit score.
The public records, missed payments, high credit utilization, and a large number of loans can grow into an obstacle to your financial freedom and create an impression that you are living beyond the means. The loan prepayment calculator is a great tool to see where you stand.
The cons of loan prepayment are mostly centered around an additional pressure on your monthly budget from making the regular extra installments. Even though they may bring you closer to future opportunities, your current emergency fund will have to receive fewer transactions for some time.