Total interest paid: This is how much interest you’ll pay over the full life of the loan. It’ll be split up and included in your monthly payments according to an amortization schedule. Total paid: This is how much you’ll pay back to the lender in total, including interest and the original amount you borrowed. Monthly payment: This is how much you’ll pay each month. Each payment will be split up so that some of it goes toward interest and some goes toward the balance of the loan.
Depending on your lender, you might also have to pay one or more fees, such as:
Origination fee: This is a one-time charge you’ll pay at the start of the loan. It may be deducted from the loan amount itself, so make sure you account for that when deciding how much to borrow. Late fee: If you don’t make your payments by the agreed-upon dates, you may be charged a fee. How much you’ll pay and when you’ll need to pay it will be outlined in your loan agreement. Prepayment penalty: If you pay off your personal loan early, you might be charged an extra fee. Fortunately, this fee isn’t very common on personal loans.
How Is Interest Calculated on a Personal Loan?
Each month, your payment will be split up into two parts: the interest portion that goes to the bank, and the principal portion that goes toward paying down your balance. Your monthly payment will stay the same while you’re paying down the loan, but the amount that goes toward the interest and principal will change over the life of the loan. That’s due to amortization. With an amortized loan, your interest payment depends on the size of your remaining balance. So, at the start of your loan, when you have a large outstanding balance, your interest payments will be larger. Over time, as your balance decreases, your interest payment becomes smaller and more of your monthly payment goes toward paying off the loan. Here’s an example of an amortization schedule for a 12-month $1,000 loan with a 6% interest rate: First, figure out your monthly interest rate. Using the same loan example as above, divide the annual percentage rate (APR) of 6% by 12 to get your monthly interest rate of 0.5%. Multiply that by your loan balance and you’ll see that your first month’s interest payment is $5 on the $1,000 loan. Each month, the amount of your payment that goes toward interest is 0.5% multiplied by the remaining loan balance.
What Is the Average Interest Rate on a Personal Loan?
Your interest rate will depend on a variety of factors. According to credit bureau Experian’s latest personal loan study, which is based on data listed on consumer credit reports, the average interest rate on a personal loan is 9.41%. Another good indicator is the average interest rates on two- and three-year personal loans from banks:
Your income Your credit score Your credit history How much you borrow Your debt-to-income ratio Which lender you choose The length of your loan term
How Do You Calculate Payments on a Personal Loan?
You can calculate your monthly payment amount by dividing the total amount you’ll pay (principal plus interest) by your loan’s term length. For example, if the total amount you’ll pay back to the lender is $1,200 over the course of a 12-month loan, your payment will be $100 per month. In some cases, your monthly payment amount might change over the term of your loan. This usually happens when you defer your loan payments while interest continues to accrue or if you miss a payment. If your lender agrees to it, a deferment allows you to pause your payments for a set period of time while you get back on your feet. However, interest will continue to accrue, so when you start making payments again, you’ll have a bigger total amount to pay off. That might mean you have to make payments for a longer period of time or make bigger monthly payments until you’ve fully paid off the loan.
What Are the Most Common Term Lengths for Personal Loans?
Most lenders offer personal loans for either three or five years, but it’s pretty easy to find loans with shorter or longer term lengths. Online lenders tend to let you choose from just a few term lengths, while credit unions may be more flexible.
Should I Use a Personal Loan Calculator Before I Apply for a Loan?
Yes—it’s a good idea to plan ahead so you understand what your monthly payment might be and how it will affect the rest of your personal finances. First, check to see if you can fit the monthly payment amount into your budget. Will you be able to make this payment every month, on time, until the loan is paid off? Next, check the total amount of interest paid. This amount, along with any origination fees, is basically the cost of the loan. Are you comfortable paying this much to the lender to be able to borrow the money? If you’re not sure, use the calculator to try out different scenarios. You may be able to get a cheaper loan by doing these things:
Choosing a shorter term length Choosing a smaller loan amount Shopping around with different lenders Working to increase your credit score before applying for a loan
Where Can I Get a Personal Loan?
There are many options for personal loans these days, including credit unions, banks, and online personal loan lenders. Online lenders who specialize in personal loans are becoming more common; they held nearly half of all personal loans in 2019, according to recent data from Experian.
Credit Unions
Credit unions often have low rates. They can be especially good choices if you need to borrow money and your credit isn’t the best, because credit unions are generally more willing to work with you. However, you’ll need to meet the membership criteria to join a credit union, such as living in a certain area, working for a certain employer, or paying a membership fee to a third-party organization. You may also be required to keep a certain amount of money in a savings account at the credit union.
Banks
Banks often have stricter lending requirements and higher interest rates than credit unions. However, it’s still worth shopping around to see what banks can offer you—and they don’t have restrictive membership criteria like credit unions.
Online Lenders
Online lenders usually make it fast and easy to apply for a loan. Many online lenders also have short approval and deposit turnaround times, sometimes as soon as the same day. But don’t let the ease of getting quick money keep you from shopping around—you might be able to get lower rates from a bank or credit union.
