How Are Installment Loan Payments Calculated?
- Kul Deep
- Last updated on July 18, 2024
Installment loans are provided online or offline and in which a fixed amount is provided to you by the lender after completing all the documents and other information. You have to deposit this amount in monthly installments over a fixed period on a fixed date with pre-determined interest. In different states of the United States, and specifically, Texas installment loans online are more considerable when we talk about these loans.
If you are interested in getting a more detailed guide to online installment loans, you can read our article on this.
And now the question arises regarding how these installment loan payments are calculated.
Installment loan payments are calculated by the lender or bank under a fixed formula. This formula stipulates that the borrower will repay the principal amount along with interest every month for a fixed period. The benefit of installment loan payments is that the borrower gets to know on which date of the month how much amount he has to pay and for how long. Apart from this, he also gets to know about the interest charged on this principal amount in advance.
Now, we also want to know the method of calculating these installment loan payments that these can be calculated.
So, let’s simplify the concept:
So, if the $10000 loan is taken at an interest rate of 6% for three years, how can this be calculated?
Principal Amount (P): $10,000
Annual Interest Rate (r): 6%
Loan Term (n): 3 years
Calculate Monthly Interest Rate (r/m)
Monthly Interest Rate (r/m) = Annual Interest Rate / 12
Monthly Interest Rate (r/m) = 6% / 12 = 0.005`
Calculate the Number of Payments (n)
Number of Payments (n) = Loan Term (in years) 12
Number of Payments (n) = 3×12 = 36
Use the Formula for Monthly Payment (M)
Monthly Payment (M) = (P * Monthly Interest Rate) / (1 – (1 + Monthly Interest Rate)^(-n))
Monthly Payment (M) = (10,000 * 0.005) / (1 – (1 + 0.005)^(-36))
The monthly Payment (M) is approximately $299.71.
Calculate Total Interest Paid:
Total Interest Paid = (Monthly Payment * Number of Payments) – Principal Amount
Total Interest Paid = (299.71 * 36) – 10,000`
The total Interest Paid is approximately $1,791.56.
So, this is how you can calculate the monthly payments.
Will I Face Penalties For Early Installment Loan Repayment
It has been observed in many cases that when you choose an installment loan and if the loan is settled before the time, the borrower has to face some form of penalty. But it is also considered a good financial move that may save you from future interest charges. Premature termination of any loan is sometimes not in accordance with the terms and conditions of the lender or bank from which the loan was taken. Because by the way it only presents a positivity when you clear any loan first and shows your financial stability. Thus, it becomes necessary that before taking the loan, you should read all the necessary conditions related to it.
Now it comes to the question of how the penalty is charged for early repayment of the loan. Is this penalty charged only on the amount as a percentage of which we pay the balance early? Or any other method according to which the lender imposes a penalty on paying the loan early? And are these installment loans fixed-rate loans? So the main thing is that before taking the loan, we should take care of some things because whether there is a penalty for paying the loan early or not depends on many factors.
Let’s focus on those points, which can save us from penalties.
Loan Agreement Conditions
Reading loan agreement conditions can save you from paying additional charges on prepaying loan payments. Do not hesitate to ask the hidden questions about the loan terms if you can understand them. So, it is very clear that the prepaying loan terms and their potential penalties are written on the documents.
Loans Type
Different types of loans might have different loan terms. Like, secured and unsecured loans.
Secured loans might have different prepaying loan penalties in comparison to unsecured loans. While applying for any of these loans, you can also consider the terms from the lender, you are taking the loan.
Inquire With The Lender
While taking loans, ask your lender to clarify every single instruction to you about the chance of prepaying the loan amount. Also, if you face any kind of unclarity, the concern point should be clear from the lender.
Legal Advice
Seeming ambiguous before signing loans, take legal advice. Never remain in a state of unclarity. A piece of legal advice can help you to understand the complex terms that you can not follow. In the meantime, you can avoid the prepaying loan penalty if you would have taken the advice before taking a loan.
What Happens If I Miss An Installment Loan Payment
If payment of installment loans is missed, it can have various consequences. Of course, the consequences are determined at the time of taking the loan, so if you miss a payment, you may face many consequences. So let us now know about the different consequences that can be seen when the loan payment is missed.
Late Fee
The first thing that can be noticed is the late fee. If you are unable to make your loan payments on the due date, you may face late fees. The basis on which this late fee is charged depends on different lenders or banks. It also depends on your location or what type of loan you have.
Impact On Credit Card
After this, the biggest impact is seen on your credit score and history. Because missing a loan payment means that it will be visible in your credit history, if you ever apply for a loan in the future, it will not be difficult for the lender to know what your credit history is like. And it will affect your credit score as well.
Accumulation Of Interest
You must know that the lender also charges interest on the principal amount at the time of taking the loan and you are legally bound to repay the principal amount along with interest every month in the form of repayments for a specified period. And if you miss a payment, you will end up paying more than the stipulated interest and will end up wasting a lot of money.
Legal Action
It is okay to miss an installment loan payment once and get that mistake corrected. But when the payment is repeatedly missed and you are tagged as a defaulter, the result is legal action. Lenders can take legal action against you in case of non-payment. He can take this issue to the court and then the consequences can be even worse. If the loan is secured, the outstanding loan can be recovered through collateral, which means selling your collateral property.
How To Manage Installment Loan Repayments Effectively
Several things need to be taken care of to manage the installment loan repayments properly because, without a doubt, properly managed payments will improve your financial behavior and also give you a boost of confidence. So let’s see what are the things you can do to manage your loan payments.
Prepare A Budget
Always keep a budget ready for yourself to stay financially strong. It should include all the expenses that you incur in a month and also write down your source of income so that you know how much money is coming in and what will be spent. If the expenses are more than the income then stop the unnecessary expenses. In this way, you will have to spend only on the things you need and you will be able to easily meet any of your monthly payments or bills.
Emergency Funds
Emergency funds work as a boon for anyone in difficult times, so you should also accumulate an emergency fund for any kind of financial hardship. If any unexpected expenses arise in a month, you can use the money from these emergency funds and you will not face any problem in meeting your loan payments.
Set Auto Payment Method
If possible, keep your loan payment on auto payment so that the payment is automatically deducted from your account on the due date every month and you will not need to remember it every month. With this only one thing you need to do is to maintain the balance in your account. To increase the amount of funds you can also try various side hustles that can increase your income.
Avoid Unnecessary Loan
It is also very important not to take out unnecessary loans if you are paying off one loan. Along with this, your first loan payments will also be disturbed. If it is not necessary, then finish the first loan first. If a payment is missed, it will adversely affect your credit score and history.
Make Extra Payments
If possible or if you don’t have a shortage of money in any month, then make extra payment for your loan sometime. With this, there will be two advantages, your loan will end soon and the other will reduce the interest rate on it. Doing this also reduces stress on the mind.
Conclusion:
Calculating the loan payments is not a difficult task, but it is difficult to understand the terms and conditions of the loan while taking the loan. So, in case of not understanding, you apply for the loan only after understanding well from your lender. When you don’t understand and miss a payment, it hurts your credit score and history. So, you should apply for a loan only after knowing how you can manage your loans.
