When you are planning
to borrow money, it is important to make sure that you do so in the most
financially prudent manner. Otherwise, you can quickly find yourself under
a mountain of debt. Many people have landed in financial hot water because they
borrowed money without taking the time to explore the consequences of doing so.
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A useful tool that you can use during this process is a loan
calculator. These tools let you play around with various possibilities to
see how they will affect you in the future. With this information, you can
decide whether taking out a loan is really the best course of action.
Online Loan Calculators
You can find quite a few different calculators online,
ranging from very basic ones to ones that are
quite complex. However, at heart
they all let you do the same thing. With one of these tools, you can see how
much you will end up paying by borrowing a certain sum of money at a certain
rate of interest.
With most of these tools, there are three main pieces of
information that you will input. First of all, there is the amount that you
want to borrow. Second, there is the term of the loan, which is how long it
takes you to pay it back. Finally, there is the interest rate associated with
the loan.
Making the Right Adjustments
By adjusting these inputs, you can see how changing them
will affect the amount that you have to pay, both on a monthly basis and in
total. For example, by extending the length of the term, you can often reduce
your monthly payments. However, paying the loan back over a longer period of
time may mean that you end up paying more overall.
Similarly, the interest rate can have a big effect on how
much you will pay in total. Even a difference of a few tenths of a percentage
point can add up over 20 or 30 years. For example, if you are borrowing £5,000
at a rate of 4 percent for 10 years, you will end up paying a total of £6,075.
If the interest rate were 4.5 percent, you will pay nearly £200 more.
For mortgages, a lower interest rate can save you quite a lot
of money, since you are often borrowing a larger sum. A 30-year mortgage, £200,000
at 4.5 percent will cost you a total of £364,000. Lowering that interest rate
to 4.2 percent will save you £12,000.
Pay Close Attention to Your Monthly Repayments
Many people pay too much attention to the monthly premium
that they will be paying, so they try to keep this as low as possible. However,
while this may save you money on a monthly basis, it will end up costing you
more in the long run. It is often wiser to pay a little more each month if it
means that you will be out of debt more quickly.
Using a loan calculator can be a great way to figure out the
true cost of borrowing money. Be sure to use one of these tools before you
apply for a loan.
If you are concerned that mounting debt is becoming too much
to deal with, the following video offers some great advice –
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