The total cost of credit alone is not just debt and interest. What else is included in the contract and depends on the amount due to be repaid? How do you calculate the cost of a loan?
A loan is an agreement between a lender and a borrower under which the bank provides the customer with a certain amount of money for a specified period of time. In turn, the customer undertakes to repay this obligation in full, in a fixed manner and within a specified time – together with interest that is due to the lender.
What is the total cost of the loan?
The total cost of the loan is the cost of both repaying the commitment itself and any additional fees that you will have to pay in connection with the debt. And there are quite a lot of them! These costs obviously include interest, but also all commissions, taxes, margins and other fees – for example, related to insurance. Sometimes additional costs – for example the aforementioned insurance – are voluntary, but in some banks and in some cases they are mandatory and they are necessary if you want to get a loan. That is why before making the final credit decision it is worth to know the total cost of the loan in a given bank.
The actual annual interest rate is extremely useful in assessing the total cost of a loan. It is also the total cost of the loan to be borne by the customer, but not expressed as a percentage value but as a percentage of the total loan amount per annum.
What makes up the total cost of the loan?
All costs included in the contract are included in the total cost of the loan. Therefore, you should read the contract carefully before signing it, so that it does not turn out that the offer is not very favorable. Everyone knows that the cost of credit consists of interest – we know the amount because it is always included in the offer. So it’s easy to calculate how much extra money will come to repay when you get a loan of a certain amount and for a certain period of time. In addition, you can use special online calculators that will definitely help in this. To the interest, however, you must also add, among others, a preparation fee and a commission.
The commission is calculated on the basis of various data – including the amount of the loan granted. There may also be insurance costs. When it comes to a small loan, you don’t need to buy it. However, in the case of higher amounts, the bank even requires that the customer have credit insurance and it is automatically added to the loan amount. We will not necessarily learn about all these additional fees when browsing offers on the Internet, but going to the bank or talking to a consultant should already provide us with all possible obligations. A bank employee should provide a detailed simulation that will include all costs.
What does the loan price depend on?
In fact, we already know what elements are included in the specific cost of credit. However, it is also worth adding that the very attractiveness of the offer presented to a specific person depends, among others, on its credibility for the bank. A person who has a stable job and good credit history can count on a better offer – and therefore lower total cost of the loan. In turn, a person who is not very reliable, even if he gets a loan, will pose a greater risk to the bank – hence the bank will require, for example, additional insurance in the event of job loss or temporary inability to work.
It is also worth paying attention to the possible consequences of earlier repayment. Many banks protect themselves in this case by adding a provision in the contract about the additional costs that the customer will incur.
How do you calculate the cost of a loan?
The cost of the loan that the borrower will have to bear can be calculated with the help of useful programs – online calculators. You must enter all the data – the amount of the commitment you want to make, the length of the loan period and the type of installments (they can be fixed or decreasing). The result obtained includes interest that is specific to a given bank. That is why every bank and parabank have their own loan calculators on websites.
You can also use aggregate calculators that show results for various offers – thus comparing them so that a potential customer can make an easier decision. There are also special formulas on the basis of which you can calculate the cost of credit yourself, although it is not easy. The cost of the loan consists of the cost of the installment multiplied by the number of loan installments. If we talk about installments at a fixed amount, their amount depends on the value of the capital borrowed, multiplied by a percentage, including the number of loan installments. The percentage ratio itself is calculated by adding the number 1 to the interest rate expressed in a fraction divided by the number of periods of capitalization.