Plan to take out a loan in the Philippines? Do you know how to compute your loan interest? How about monthly loan payments? You’re on the right page to better grasp how interest works so that you can make informed decisions since loans have interest charges in general. Also, calculating loan interest and monthly loan payments can be complex. It’s important to realize how these factors affect your overall loan costs.
Nothing to worry about, as this article will guide you on how to compute your loan interest and monthly loan payment in the Philippines so that you can manage your finances accordingly. In addition, we’ll provide you with relevant information and tips.
Ready to learn? Scroll down now.
Loan interest is the cost, rate, or percentage of borrowing money. From lenders’ perspective, it’s the amount they make by lending the money to the borrower. While from the borrowers’ part, it’s an additional payment to the borrowed amount.
Before we dive into loan interest computation, let’s first understand the three (3) essential components that will determine your interest payment.
As stated earlier, the computation of loan interest, as well as monthly loan payments, can be a daunting task. However, by following a few simple steps and being familiarized with formulas, you’ll know how to compute.
For you to have a clear idea of computing loan interest, let’s get to know the methods since lenders use a variety of approaches to demand interest from borrowers.
With the fast-paced technology, using a loan calculator is the easiest way. However, if you want the most accurate figures and preferably do it manually, here are the two methods to compute your loan interest.
Installment loans like auto loans and mortgage loans are usually using this method. In fact, numerous lenders base their interest rates on an amortization plan because there’s a gradual increase in interest plus loan term extension. That’s why lenders primarily benefit from this so-called amortizing interest method.
Additionally, loans in this method have fixed monthly payments and are payable over time in equal increments. But the way the lender calculates interest varies over time. And as time draws closer to your final payoff date, payments will be more on principal and less on interest.
Let’s further explain this method through an example. For instance, you have a personal loan amounting to P30,000 which you’ll be paying in 24 months (2 years) with a fixed monthly payment of P1,250 and an annual interest rate of 5%.
Formula:
Interest = (Annual interest rate ÷ Number of payments) x Loan balance
So, with the above-given data and formula, here’s how to compute.
Interest = (5% ÷ 24)
Interest = 0.0021 x 30,000
Interest = 62.50
To get the loan interest for succeeding months until you reach the 24th payment or the end term of your loan with zero balance, you’ll just repeat the process illustrated above with the new loan balance.
The table below can be your reference to back up the mentioned process and computation above.
The second method of computing interest is simple interest, which means a straightforward or the easiest computation of interest based on specified terms.
Formula:
Interest = Principal loan amount x interest rate x loan term
Having the same example, here’s how to get the loan interest.
Interest = 30,000 x 5% x 2
Interest = 3,000
Are you getting the idea? What’s your choice of computing loan interest among the methods mentioned earlier? Well, there’s more to learn in the next part. Let’s proceed.
Likewise, the computation of monthly loan payments can be done faster using a loan calculator, the same as calculating loan interest. You will input the loan amount, interest rate, and loan term. Then, the loan calculator will provide you with the monthly loan payment amount.
Nevertheless, to calculate accurately without a bias between borrowers and lenders, let’s show the manual computation. Also, there are two methods that we can use as follows.
To better understand this method, let’s put it this way. For instance, you’ve applied for a 5-year auto loan with a principal amount of P2,000,000. The loan is payable in 60 months with an annual interest rate of 10%.
Formula:
P = a (r ÷ n) where P represents your monthly loan payment, a for the principal amount, r stands for interest rate, and n for the number of payments per year.
To calculate:
P = a (10% ÷ 12)
P = 2,000,000 x 0.0083
Note that when your interest-only period expires, your loan becomes an amortizing loan. Let’s learn another computation method in the next section.
This method pertains to an installment basis where borrowers pay regularly according to the timeframe set. It’s like computing your loan interest using the amortizing interest method.
An excellent example of amortized loan payment method is an auto loan. With that, let’s consider the sample scenario from the first method to compute your monthly loan payment using this second method.
Formula:
P = a ÷ { [ (1 + r) n ] – 1 } ÷ [ r (1 + r) n] where P represents your monthly loan payment, a for the principal amount, r stands for interest rate, and n for the number of payments per year.
As you notice, the formula is quite complex. So, let’s compute it by group.
We’ll refer to this part “{ [ (1 + r) n ] – 1 }” as group 1 while this one “[ r (1 + r) n]” as group 2.
We’ll start with group 1”{ [ (1 + r) n ] – 1 }”:
{ [ (1 + 0.0083) n ] – 1 }
{ [ (1.0083) n ] – 1 }
{ [ (1.0083) 12 ] – 1 }
{ [12.0996] – 1 }
{11.0996}
Next to compute is referred to as group 2 “[ r (1 + r) n]”:
[ 0.0083 (1.0083) 12]
[0.10042668]
Now, let’s proceed to get the monthly loan payment.
So, the value for this part “{ [ (1 + r) n ] – 1 }” is 11.10 while this one “[ r (1 + r) n]” is 0.1004.
Thus,
P = a ÷ { [ (1 + r) n ] – 1 } ÷ [ r (1 + r) n]
P = 2,000,000 ÷ {11.10} ÷ [0.1004]
P = 2,000,000 ÷ {11.10} ÷ [0.1004]
P = 2,000,000 ÷ 110.56
As you noticed, the interest-only method is more effortless than amortized loan payment method. Also, the latter has higher monthly payments than the former method. However, both help compute your monthly loan payments. More than these computations, paying your loans on time is a must.
For every loan you have, it’s best to pay it back on time. If you don’t pay loans on time, you could have difficulty getting approved for loans in the future.
Here are some key points to keep in mind about paying your loans on time:
To summarize, it’s best to pay your loans on time. But if you can’t make it, better to find ways the soonest because late fees can ruin your cash flow. Besides, before applying for a loan, you must check if you can pay. Or else it’s not good to take out a loan.
In conclusion, loan interest and monthly loan payments are factors when applying for a loan. By learning the guides, tips, and information mentioned earlier, you’ll have a better understanding before you can take out a loan in the Philippines. Although the process may seem complex, remember that a lot of resources are available to help you such as RFC’s cash loan calculator and financing loan calculator. With a little research and planning, you can be sure to get the best deal possible.
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