Applying for a loan is one of the things that people are looking forward to do. This is because they’ll be getting a lumpsum of the money they need in exchange for a monthly amount. Why is this good, if you may ask? Because most of us need a large sum and are “okay” in paying for a monthly amortization even with interest. Although calculating the interest rate is in no way part of your job, calculating for it upfront could really do you a lot better.
What is the importance of calculating the interest rate ahead of time?
Since you’re the one who will be paying the interest rate, would it just be fair if you know how you will pay for it? I mean, some of you won’t mind and would just allow the banks to calculate for it, it’s still going to be better if you know how to compute for it manually because you won’t know when you’ll be needing it next.
- First thing is to let you realize that “it’s not all the same.” Although banks offer different types of payment arrangements, you won’t feel the interest eating you up since it’s just a small amount per month. But knowing how to compute for the interest rate could help you in making better decisions;
- So that you know how much you have to set aside in terms of paying for the interest rate;
- We all know that banks have their own kind of hocus pocus that most of us just disregard. To tell you honestly, in these little things, banks grow in multitudes.
Let’s put it to an example. Say for example you make a loan of Php50, 000.00 payable in 12 months/1 full year. You inquire in two (2) different banks and let’s name them:
- Bank ABC; and
- Bank 123
Bank ABC
This bank offers a loan that has a processing fee of Php2, 500.00. This would mean that your take home if the bank approves your loan is Php47, 500.00. Although they have a processing fee, they offer a low interest rate monthly (1.5%). So you have this option in your hands now;
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Bank 123
On the other hand does not take out a processing fee but has a slightly higher interest rate monthly (1.75%).
Many of us would follow our gut to not take Bank ABC because it has a processing fee. Although adding that the Php2, 500.00 is just an example and other banks can charge more. But are you really being thrifty and wise if you choose Bank ABC? Or would it be better if you choose Bank 123? Before we go and look at our computation, let us first know how the interest is in computation with every little detail there is.
- Bank ABC – 1.5%
- Bank 123 – 1.75%
To compute for the additional rate in monthly:
You need to take out the percentage and multiply it by the number of months the loan is payable. In our example:
- (1.5%) x (12) = 18; so this becomes .18 if it’s for percentage
- (1.75%) x (12) = 21; so this becomes .21 if it’s for percentage
After you get their percentage, you multiply that by the amount of loan you’re getting:
- (.18) x (50, 000) = 9, 000/12 = 750
- (.21) x (50, 000) = 10, 500 = 875
This is the interest that you will be paying for in the span of 12 months (time loan is payable). Dividing that by 12, would be your monthly additional rate. In our scenarios, Bank ABC will have a monthly interest of Php750.00 and Bank 123 will have a monthly interest of Php875.00.
How do you compute for your monthly amortization?
This one is pretty straightforward, you just have to take the loanable amount and divide that by the number of months you’re willing to pay for the loan:
- 50, 000/ 12 = 4, 166.67
How do you compute for your all-in-all monthly amortization plus the interest?
In computing for the overall payment you’re to make including the interest, you take everything we’ve learned and add that to the monthly amortization that you have. However, that would seem more complicated, right? So let me just give you the direct formula here so that you don’t have to stress on which to put where:
Bank ABC’s monthly amortization plus interest
- Interest Rate of (1.5%) x 12 = .18
- (.18) x loan amount (50, 000) = 9, 000
- Overall interest (9, 000) / 12 = 750
- Monthly interest (750) + Monthly amortization (4, 166.67) = 4, 916.67
- Total monthly payments for Bank ABC = 4, 916.67
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Bank 123’s monthly amortization plus interest
- Interest Rate of (1.75%) x 12 = .21
- (.21) x loan amount (50, 000) = 10, 500
- Overall interest (10, 500) / 12 = 875
- Monthly interest (875) + Monthly amortization (4, 166.67) = 5, 041.67
- Total monthly payments for Bank 123= 5, 041.67
Doesn’t it seem to be a little obvious? Of course you’d go for the one with a lower interest rate which is Bank ABC, right? But have you taken into account the Php2, 500.00 in the beginning of the application? To give you a better view of it, let me give you a table:
**Note: Everything in the table has considered everything we’ve mentioned above. Meaning, it will be just values and results in the table. It’s made to help you realize in choosing between different bank loan applications.
Month | Bank ABC (1.5%) | Bank 123 (1.75%) |
0 | 2, 500.00 | 0 |
1 | 4, 916.67 | 5, 041.67 |
2 | 4, 916.67 | 5, 041.67 |
3 | 4, 916.67 | 5, 041.67 |
4 | 4, 916.67 | 5, 041.67 |
5 | 4, 916.67 | 5, 041.67 |
6 | 4, 916.67 | 5, 041.67 |
7 | 4, 916.67 | 5, 041.67 |
8 | 4, 916.67 | 5, 041.67 |
9 | 4, 916.67 | 5, 041.67 |
10 | 4, 916.67 | 5, 041.67 |
11 | 4, 916.67 | 5, 041.67 |
12 | 4, 916.67 | 5, 041.67 |
Total | 61, 500.04 | 60, 500.04 |
As you can see, although Bank 123 made you pay higher monthly amortizations, in the end it resulted in a lower amount than Bank ABC which was almost Php200.00 higher. This is what most people fail to realize; they tend to forget to look at the whole picture.
This doesn’t just apply to salary loans, however. This actually applies to all of the things in which you have to pay monthly. Credit cards, housing loans and programs, or whatnot. To be frank, this computation is not limited just for people applying in salary loans. Moreover, the computation in this table or article just serves as an example so that you know what to do when faced in these types of situations. You have to approach the matter in the most mathematical way as possible so you get the most out of what you’ll be paying for.
Important things to remember:
- Loans are not just payable for a year, some can be payable even up to ten (10) years with lesser and lesser interest. Although this seems good for an eye of someone who really needs it, if you come to think of it, the total would be a lot bigger if you just pay it out for a year or two. Just have to sacrifice a little juice but it yields something good in return.
- Note that the values here are not just the thing you should think about. What if you missed a due date, what would happen? Of course, there are late payment charges that might be charged to you if you miss a payment so be focused when you apply for the loan.
- Although the sample calculation above is a general example, it can help you in calculating whether a certain bank’s loan is better than the other in terms of you getting the money and you paying it back.
So if you have multiple options, try to do a simple computation. Do you now understand how important it is to ensure that you know how to calculate for the interest rates? What do you think would be the best choice and plan in getting a loan application?
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