Working Out The Total Cost Of A Loan

Working Out The Total Cost Of A Loan



Working Out the​ Total Cost Of a​ Loan
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.




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