When looking to borrow money, it’s important to have a custom loan calculator and understand key points about loans before reaching out to any lender, including a bank, credit union or other institution.
*Please note that we do not offer loans. This calculator is for education purposes and to illustrate how loans work.*
When looking to borrow money, it’s important to have a custom loan calculator and understand key points about loans before reaching out to any lender, including a bank, credit union or other institution. This guide offers a custom loan calculator (above), in addition to a series of 9 key points we want you to keep in mind in order to make a good decision for your financial health.
The Custom Loan Calculator Explained
Loan payments are a function of the amount you borrow, the interest rate and the number of payments you will make. We’ll assume you have determined how much you’ll need to borrow for your project, purchase or other use. If you aren’t sure what you can afford and would like to get in touch with us for a detailed and thorough evaluation of your financial health, please visit our Wealth Management page.
Calculator Key Factors
Working from the top of the auto loan calculator down, there are five factors:
1. Loan Amount
The total amount you’re borrowing. Be sure to include any taxes, fees or other outlays that get the loan started.
2. Number of Months (Loan Term)
The loan term is the length of the loan contract in months. Longer periods will result in lower payments but could also trigger higher interest rates and reduced principal pay-down.
3. Interest Rate
This rate is determined by:
- Your credit score
- Current market rates
- Loan term length
- Use of the funds (some types of loans are more expensive than others)
- Your personal financial situation
Custom Loan Calculator Outputs
1. Monthly Payment
This is the amount you’ll owe the bank each month for the duration of your loan. In most situations, it will not fluctuate, though some loans like HELOCs (home equity line of credit) and ARMs (adjustable rate mortgages) have rates that move around.
2. Total Interest
This is the amount of money you’ll have paid to borrow the money over the course of your loan.
3. Total Principal and Interest
This is the total amount of money you’ll have paid to buy the car. In the base case plugged into the custom loan calculator by default, a $500,000 loan for 180 months (15 years) years at 5.0% will result in a payment of $4,219 per month. Total interest will be $260,000, resulting in a total outlay of $760,000.
9 Loan Tips to Keep in Mind:
- Interest Rates: These can be fixed (unchanging) or variable (fluctuates with market conditions). Read every word of your loan documents!
- Balloon Payments: Teaser rates are known to get you in the door, but sometimes the rates are low because you’ll owe a lot of money all at once down the road.
- Secured vs. Unsecured: Secured loans are backed by collateral (home, car, other asset) that can be seized if you default or stop paying on your loan. Unsecured loans (credit cards, personal loans) aren’t backed by specific assets. As a general rule, secured loans have lower rates than unsecured loans.
- Credit Score Impact: Your credit history affects your ability to qualify and the interest rate you receive. Timely payments improve your score; late payments harm it.
- Types: Common loans include mortgages, auto loans, student loans, personal loans and business loans.
- Amortization: In the beginning of the loan, you’ll pay more interest than principal (you’re paying more money to borrow than you’re paying back). Towards the end of a loan, you’ll pay more in principal.
- Origination Fees: One-time charges for processing a new loan, typically a percentage of the total amount. Read your loan documents carefully. Lots of ‘required fees’ end up being negotiable.
- Prepayment Penalties: Some loans charge fees if you pay off the balance early. Read your loan documents carefully!
- Refinancing: Process of replacing an existing loan with a new one, typically to secure better terms or lower interest rates
Understanding how car loan payments are calculated empowers you to negotiate better terms and avoid financial surprises. Before signing any loan agreement, always calculate your monthly payment and ensure it fits comfortably within your budget.
Can we help you with our Custom Loan Calculator?
For more than 47 years, we have collaborated with our clients in their investment decision making process as they pursue their long-term financial goals.
We are committed to keeping your goals, concerns and attitude about investing at the heart of your plan.
If you’re considering a large purchase but want additional guidance and ready to experience our personalized investment approach and exceptional client service, contact Jason R. Clark, CFA at 949.424.1013 or jclark@kovitz.com.
