Planning to take out a personal loan? Before signing, have you ever wondered how much it’ll really cost you? Most borrowers only think about interest rates or tenure, but the hidden fees and other charges also impact the actual cost of the final repayment amount. Whether you are borrowing from an app or any financial institution, it’s essential to consider all the aspects to avoid any confusion in the future.
In this blog, we’ll help you calculate the true cost, make an informed decision, and learn tips to minimise the loan cost.
What is a Personal Loan Cost?
Personal loan cost refers to the total amount of money you will pay back over the loan’s repayment tenure. This includes the principal amount borrowed, rate of interest, loan term and other additional charges. Borrowers must know the factors that will influence the loan amount’s true cost to avoid any future confusion.
How to Calculate the True Cost of a Personal Loan?
Calculating the true cost of the loan goes beyond the interest rate. Understanding other factors is equally important, and the following are the ones that you need to consider:
- Loan Amount: The total amount of money you have or are considering borrowing either from a financial institution or a personal loan app.
- Interest Rate: The percentage of the principal amount you pay as interest. The rate can vary depending on your credit profile, lender’s policies and the type of loan you choose. The are two types of interest rates: fixed and variable. The rate that remains constant throughout the tenure is fixed interest; the interest that keeps changing per market conditions is variable interest.
- Fees: Borrowers must know the fees they’ll be paying when taking out a loan. Common fees include processing fees, late repayment penalties, and other charges, which increase the total cost of the loan.
- Loan Tenure: The total time you’ve selected or given to you by the lender for the repayment of the loan amount. Longer tenures may decrease the monthly payments, but you will have to pay more interest over time.
To calculate the EMI of your loan manually, use the following formula:
EMI = [P x R x (1+R)^N] / [(1+R)^N – 1]
Where,
EMI = Equated Monthly Installment
P = Principal Amount
R = Rate of Interest
N = Tenure of Loan in Months
Calculating the total cost can be tedious. However, lenders like Bajaj Finserv have introduced EMI calculators on their platforms to save you time.
Using EMI Calculator
The EMI calculator is the tool that simplifies the calculation process and is incorporated by many lenders. Using this calculator, you can get a clear picture of the actual cost of the personal loan you’ll be borrowing. Adding the loan amount, interest rate, and tenure will give you the number you’ll pay as an EMI.
The calculator helps you compare different loan options, make a budget to avoid financial restrictions and choose the best deal.
Pro Tips To Minimise Personal Loan Cost
If you are keen to know the tips on how to reduce the cost, here are some of them:
- Improve Credit Score: A higher and more impressive credit score justifies your creditworthiness and increases your chances of getting a loan at lower interest rates.
- Opt a Shorter Tenure: Longer tenures may reduce the EMI amount, but you may end up paying higher interest. If you are willing to pay higher monthly payments, choose a shorter tenure to reduce the total interest amount paid over time.
- Compare Offers: Interest rates and charges vary depending on the lender. Hence, avoid blindly trusting any one lender. Do your research, choose the best deal, and make an informed decision. You can even check personal loan apps for special offers that can help reduce the cost.
- Use an EMI Calculator: The calculator allows you to compare costs, plan better, and choose the loan that suits your current financial situation.
- Negotiate Fees: You can try negotiating with lenders, as some might be open to waiving some charges, especially if you are a regular borrower and have a good credit history.
Bottom Line
Learning more about the actual cost of the loan you’ll be applying for is essential for making a final decision and avoiding financial burdens. Consider all the factors, including principal amount, interest rate, tenure, and other charges, to get a clear picture of the repayment amount. To ease the work and save time, use personal loan calculators to estimate the monthly payment and plan your budget.
Whether you choose financial institutions or user-friendly instant loan apps like Bajaj Finserv, staying informed and comparing the options is as important as applying for a loan and managing your finances.
