These 3 things determine how much a personal loan will cost you.



Make sure you understand how the value of your loan is determined.

Personal loans can be a great option if you need to borrow cash. This is because they tend to offer affordable interest rates. as well as You can use the money received from them for almost any purpose.

But before you take a personal loanIt is recommended that you understand exactly how much your loan will cost you. In the end, you will end up paying the lender for the loan, so you need to be sure that you are comfortable with the total amount that will cost you in the end.

Actually there is three there are various factors that will affect the cost of borrowing, and it is useful to understand all three of them to make sure that a personal loan is right for you.

This is what they are.

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1. Interest rate on the loan.

Interest is the cost of the loan expressed as a percentage of the loan amount. For example, if you work at 10% per annum, then every year you will pay the bank 10% of the loan cost.

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A high interest rate means that your personal loan will be much more expensive than if you qualify for a loan at a low rate. For example, a $ 10,000 personal loan repayable over five years at 10% per annum will cost you $ 212.47 per month, and the total interest expense is $ 2,748.23 over the life of the loan. In contrast, the same loan at 25% interest rate would be accompanied by a monthly payment of $ 293.51, and the total interest expense over time would be $ 7,610.79.

The interest rate can vary significantly between lenders, so get multiple quotes to find the best and most affordable rate. Your credit rating can also play a role in how much interest you end up paying. Therefore, before applying for a personal loan, it is recommended to make sure of this, because, as you can see, interest rates on personal loans will significantly affect your costs.

For more information on your credit rating and its importance, check out the following guides:

2. Loan amount.

Since the interest rate is equal to a percentage of your loan amount, getting a larger loan means your interest expense will be much higher. Since you have to pay both principal and interest, a higher loan balance will also mean much higher monthly payments.

With the above example in mind, suppose you borrowed $ 20,000 for five years at 10% per annum, instead of borrowing $ 10,000 over the same period. In this case, your payment is doubled. Instead of paying $ 212.47 a month, you are now paying $ 424.94, and your total interest expense will jump from $ 2,748.23 to $ 5,496.45.

This is why you should borrow exactly as much as you need and try not to borrow more than is absolutely necessary.

3. Maturity dates

Finally, the time it takes you to fully pay off your loan balance will also determine both your monthly payments and your total expenses.

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You may be able to stretch the payout schedule over a really long period. This makes your loan more affordable because you will cut your monthly payment. But when you take this approach and agree to pay interest for many, many years, you end up paying a lot more.

Again, let’s take the above example of borrowing $ 10,000 at 10% per annum, but this time let’s assume that you repay the loan over 10 years, not more than five years. While your monthly payment goes down to $ 132.15, your total interest expense rises to $ 5,858.09 over time.

Ultimately, you need to carefully consider each of these three criteria. If you want to lower your borrowing cost, try to choose a loan with a low interest rate, as well as the lowest possible loan balance and the shortest maturity that you can afford.

To find out more, see our guide to how personal loans work provides additional information to help you decide if a personal loan is right for you.


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