People take out personal loans for varying reasons which include funding a start-up business, consolidating debts and covering medical expenses. In such cases, personal loans are usually preferred because they are ‘unsecured’ and not backed by any collaterals. This is because secured loans are usually backed by a property like your home or personal car, so there is a risk of losing these assets if complications unfortunately arise.
A personal loan calculator is a tool that allows you to compute your Effective Interest Rate (EIR) and monthly repayment amount by simply entering your required loan amount and the duration of your loan term. By using a personal loan calculator, you can then plan your monthly budget accordingly. Many financial institutions do not publicise the EIR as it reveals the true cost of borrowing.
The formula for calculating EIR is:
Where r is the interest rate per period in decimal form, and i is the effective interest rate in decimal form.
Effective interest rate per period: i = [1 + (r / m)] m − 1
Effective interest rate for t period: it = (1 + i)t − 1
Substituting the first equation into i in the second equation: it = [1 + (r / m)]mt − 1
Instead of grabbing a pen and paper to figure the math out, using a personal loan calculator grants you the ability to customise and experiment with different figures according to your needs. For instance, you can key in varying loan amounts and loan terms to see your monthly payment. According to your financial situation at hand, analyse which outcome and plan suits you best!