Loan Calculator | How To Calculate Cost Of Borrowing
Throughout your life, you’ll have plenty of expenses to consider, some of which are smaller and can be paid for easily, while others are more costly and need to be financed over time.
If you’re in the market for a loan, whether it’s to cover the cost of an unexpected expense or make a large purchase, our loan calculator can help you estimate monthly payments which will allow you to figure what your budget is.
Finding Your Loan
Generally speaking, a loan is a lump sum of money that you can apply for through various financial institutions, otherwise known as lenders. However, there are many loan types available, each of which can serve a different purpose.
There are mortgages to purchase homes and car loans to finance the purchase of a new or used vehicle. Then there are traditional installment-based loans, which can be used to cover just about any expense.
Choosing Your Lender
When looking for the right loan, chances are you’ll be faced with a few options when it comes to your lender.
You can choose a prime source, such as a big bank or credit union, where getting approved is a bit more difficult but loan conditions are more favorable. You can also apply with a subprime institution, like a private or alternative company, where approval standards are more lenient and loans slightly higher in cost.
Either way, the application and repayment processes will be relatively the same. When applying, your finances be checked to evaluate how risky you are as a potential client.
During the application process, your lender may request proof of your:
- Name and address
- Employment history
- Gross monthly/yearly income
- Banking information
- Recent debts
- Credit report and credit score
- Assets (house, car, etc.)
- Cosigner’s personal/financial information (if any)
The more qualified you are to manage your loan payments, the more chance you’ll have of getting approved for a larger loan at a reasonable interest rate and a flexible repayment plan. This is particularly true when it comes to prime lenders.
If you have a low income and/or bad credit, you can still get approved for a subprime loan. Just be aware that, due to the increased level of risk you pose, your loan is likely to be smaller, have a higher interest rate, and a less negotiable repayment plan.
Applying With a Cosigner
One way that you can earn better loan conditions, as well as avoid defaulting is by applying with a cosigner (click here for more information).
They would need to be someone that’s trustworthy, has healthy finances, and decent credit. Essentially, by cosigning, they are agreeing to take over your payments if you cannot afford them, which would at least prevent any debt collection penalties.
Nonetheless, before you apply together, make sure that your cosigner is fully aware of the potential consequences. If they should become responsible for your payments and also have trouble affording them, their finances could end up just as damaged as yours, leading to unmanageable debt, bad credit, or worse.
Applying With Collateral
If you don’t have a cosigner, you can also see more positive loan results by offering up one of your assets as collateral (typically a house or vehicle), which also decreases the risk for your lender. Just need in mind that should you default on a secured loan your lender could potentially cease your asset.
If you’re qualified to handle all the costs associated with the loan, the appropriate funds will be sent to your bank account soon after you’re approved, typically by direct deposit, cheque or e-Transfer.
You would then repay your borrowings through equally timed and divided installments over several months to several years. With prior negotiation, many lenders can also adjust your plan to allow for accelerated (larger or more frequent) installments.
Although the size and consistency of your installments will also vary, most lenders will offer numerous options, such as:
- Monthly (12 payments yearly)
- Semi-monthly (24 payments yearly)
- Weekly (52 payments yearly)
- Bi-weekly (26 payments yearly)
A loan can put you in debt for quite some time, so it’s imperative to choose the length and frequency of your payments carefully. Before you apply, be sure to have a reliable source of employment, as well as enough savings to cover yourself if you should become unable to work.
If you do plan to make accelerated installments at some point, it’s important to first ask your lender whether they charge a prepayment penalty for deviating from your original plan. With that in mind, it’s also important to be fully aware of all the other costs that may be included in your final loan balance.
Along with your installments and possible prepayment penalty, you must consider any other mandatory/hidden costs, such as:
- Interest – Every lender will charge an interest rate on your loan payments. That rate can vary depending on where you apply and how qualified you are. Some lenders offer two kinds of rates. A ‘fixed’ rate won’t change during your repayment plan, so it’s easier to calculate. On the other hand, a ‘variable’ rate will fluctuate according to Canada’s prime rate, helping you save money.
- Penalties – Although you may be able to afford your payments now, you must be aware of what happens if you default on them. Whether you’re late, short on, or you miss a payment entirely, a penalty can be applied for breaking the rules of your loan contract.
- Fees – Before you apply, be sure to get a price quote, as some lenders will tack on certain fees for loan origination and administrative purposes.
- Taxes – Depending on your lender’s policies, as well as your province, your loan may also be accompanied by various taxes, such as HST (Harmonized Sales Tax), GST (Goods & Services Tax), and PST (Provincial Sales Tax).
Watch Out for Loan Scams
When comparing loans, it’s also vital to research your potential lender properly. Unfortunately, this is because there are many predatory organizations and scam artists looking to take advantage of your need for credit.
One way they may do this is by charging “loan insurance” in exchange for a substandard or totally fake loan. No legitimate lender will ever ask for it before depositing your loan since such demands are illegal.
In fact, you should avoid any “lender” that charges any sort of fee in advance, offers to guarantee your approval with no questions asked, or doesn’t have confirmable business credentials.
How to Budget for Your Loan Payments
Remember, a loan can put you in debt for a long time, so it’s essential to use our Loan Calculator, then factor the cost of your payments into your budget before applying.
If your payments are outside of your budget, there are a number of ways that you can avoid the cycle of debt that may occur, such as:
- Request a smaller loan amount
- Ask for overtime hours or a raise at your current job
- If your income is insufficient, apply for a secondary job
- Consolidate any other outstanding debts
- Request to have your payments reduced and/or repayment plan extended
Why Your Credit Score Matters
For loan types, the strength of your credit will be an important factor during the approval process, because it showcases how likely you are to make payments as agreed. This is particularly true when it comes to your three-digit credit score.
Ranging from 300 to 900, prospective lenders can view your score whenever you apply for new credit, which they may do while examining your credit report. If approved, your score will fluctuate according to your payment activity until your loan is fully repaid. If you make a responsible payment, your score goes up, giving you better credit. If you default, the opposite will occur.
The closer your score is to 900, the stronger your credit is considered. Since good credit usually means you have less chance of defaulting, lenders will be more likely to approve you for a larger loan, a lower rate, and a more adjustable plan.
Although every lender has different standards and some don’t perform credit checks at all, it’s best to have your score within the 650-900 range before you apply in order to see the most positive results.
Check out this article for more information about what your credit score range means.
Here are a few things you can do to obtain a good credit score:
- Request a free yearly copy of your credit report from Canada’s credit bureaus (Equifax and TransUnion)
- Regularly check both versions of your report for errors, fraud, and identity theft
- Don’t apply for too much new credit within the same year
- Complete your payments as scheduled and avoid defaulting at all costs
- Make more than one credit card payment per month
- For credit cards and lines of credit, make minimum payments when you can’t afford full ones, but avoid using more than 30-35% of your available credit limit
The Right Time to Apply
Like any credit product, a loan should only be applied for when you are financially prepared to handle all your payments. Since defaulting can result in bad credit and create all sorts of financial problems for you, make sure you have a steady income, a good credit score, and even some security to offer, such as a cosigner or collateral.
Calculate Your Loan Payments Today
If you are currently having trouble deciding whether or not you’ll be able to afford your upcoming loan payments, just take a look at our loan calculator above. Budgeting for your loan has never been easier.
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