Loans provide better financial stability to a business or individual as they emerge as one of the best ways to allocate necessary capital to meet financial goals very easily. If you want to calculate your loan, then you should be aware and understand several things like principal amount, rate of interest and several types of fees. Various financial organizations provide loans to general people to big organizations. You can choose short-term personal loans, quick personal loans, business loans, and equity loans from a genuine lender, but you should know how to calculate the same.
The total cost of a loan impacts your financial status be it short or long-term goals. Understanding the total cost of your loan helps the person to make informed decisions based on several types of financial obligations.
Here, in this blog, you will know several types of loan terminology which are very important for every borrower to know.
Rate of Interest
The rate of interest is the total amount that your financial institution charges you for borrowing a particular loan be it a short-term personal loan or a long-term business loan. Interest can be either fixed or variable based on the type of interest applied to your loan amount. If your loan has a fixed interest rate, it means the interest will stay the same through the tenure of the loan. If you have selected a variable rate of interest, then your interest rate will change over a particular point of time and hence you need to pay variable costs every time. It is based on the market fluctuations. The amount you pay every month in the form of interest rates will show in your loan dashboard.
Principal Amount
The amount that your lender considers as borrowing upfront is known as the principal amount. It doesn’t consist of several types of fees and rates of interest. For instance: if you have purchased a new property or home for about 300000 rupees and put down about 10000 rupees, then you need to borrow an amount of 290000 rupees from your banking institution. This 290000 is known as the principal amount.
Loan Processing Fee
To cover several types of processing costs and administrative charges, lenders take loan fees from the borrower. There are mainly two forms of loan fees: origination fee and application processing fee.
Annual Percentage Rate (APR)
Reviewing APR or annual percentage rate will help the borrower to get the most accurate figure of loan borrowing cost. APR depicts the cost of borrowing on the particular amount you have borrowed from a lender. Your APR will consist of the loan fee and rate of interest as it is represented as the percentage of the loan borrowing on an annual basis.
Understanding the Loan Term
It’s the time when you are required to pay back your loan amount with a full and final settlement. The loan tenure or term varies from one loan to another as it directly depends on the repayment term and the type of loan. For instance, a short-term personal loan may have several years of loan term but if you are purchasing a mortgage loan, then you will get a loan term of 15 to 30 years. If you choose a shorter loan term, then it is possible that you have to pay a very low rate of interest over a particular point in time.
Fees to Understand to Know or Calculate the Total Cost of the Loan
There are several fees levied by the lender or the financial institution to secure their loan amount. You should know the fees and other charges to get a clear view of the total cost of the loan. Here are they:
Ongoing fee: Ongoing fee is also known as account keeping charges and it’s a type of recurring amount that you have to pay to make your account active for longer.
Establishment Fee: various lenders charge upfront costs while setting up your value. It impacts the overall cost of the loan as it may vary from one lender to another and add to the total loan amount.
Late Debt Repayment Charges: This fee is levied by several lenders if you miss a particular debt or have a late payment fee history. Lenders impose such penalties to make their loan amount secure by all means. A borrower must agree and abide by the terms and conditions of the lender and make sure that the lender is genuine by all means.
Summary
In calculating the total cost of the loan, every borrower should know its basic aspects like principal amount, rate of interest, Annual Percentage Rate and loan processing fee. There are several other charges included in the total cost of the loan which every borrower should know like prepayment charges, missed EMI charges, foreclosure charges etc.
