Every important life decision is accompanied by a loan, it seems. Loans help us pay for college, afford our cars, and finance our dream homes so we can achieve goals that would otherwise have seemed impossible.
Loans can also be complicated: technical jargon can be inaccessible and the process of borrowing can seem opaque. To help you with the basics of borrowing, we created a loan calculator that you can use to find out how loan payments are calculated and whether or not you can afford it.
Our loan calculator shows you how high your monthly installments can be, depending on the loan amount, term and interest rate. Give it a try and see what is best for your budget.
Loan types
Mortgages
A mortgage is a loan that is used to pay off a home without paying all of the expenses at once. Most home buyers take out mortgages to buy their homes. Typically, mortgages require down payments (the more you prepay, the lower the interest rate and monthly payment), and you make a monthly mortgage payment that pays off the principal and interest for 15 or 30 years until the home is paid off in full.
Home loan
A home equity loan, also known as a second mortgage, is a lump sum that you pay back over a fixed term and use your home as collateral. The amount you can borrow depends on the available equity that you have accumulated in your home – usually up to 85% of the equity. This loan can be used for debt consolidation, home improvement or other large expenses. However, if you default on the loan, the bank could seize and foreclose your home.
HELOCs
A home equity line of credit (HELOC) uses the available equity in your home to fund large expenses (like tuition fees or a home repair) or to consolidate debt, much like a home equity loan. The main difference is that a HELOC is a revolving line of credit, like a high limit credit card, and not a loan. A HELOC can be potentially risky as your home is security and can be confiscated if you disagree with the loan. Due to the COVID-19 pandemic, major banks like Bank of America and Wells Fargo have tightened lending standards around HELOCs.
Car loans
Put simply, car loans are taken out to pay for vehicles when you cannot upfront the total cost. With these loans offered by banks and car dealers, the car you buy is the security. Car loans require a down payment that can offset the interest rate you pay over the life of the loan. The term usually varies between 36 and 72 months and the interest rates are around 3-5%. Many personal finance experts recommend taking out a car loan only if you are well positioned to pay it off over 36 months.
Student Loans
According to EducationData.org, 44.7 million borrowers owe a total of $ 1.6 trillion in student loans. Most student loans provided by federal and state governments as well as private lenders give a grace period of six months after graduation or drop to below half the enrollment. After that, fixed monthly payments are due. Federal student loan payments are currently suspended until September 30, 2020 due to the pandemic. You can pay them off if you want, but if you don’t pay it won’t affect your credit history.
Personal Loans
Personal loans are known for their versatility and can be used to pay for home repairs, home renovations, weddings, vacations, funerals, and other large expenses. Most commonly, however, people take out personal loans to consolidate high-interest credit card debt at a lower interest rate with friendlier payment terms. Most personal loans are unsecured and do not require collateral.
How long will it take to pay off my loan?
How long it takes to pay off your loan depends on the term you choose and how much you can and want to pay monthly. In general, your loan payments shouldn’t be more than 5 to 10% of your monthly budget. Each payment is used to repay the principal (the original loan amount) plus interest.
For example, let’s say you take out a $ 20,000 personal loan for a home repair project. If the maximum amount you can afford to pay back your loan each month is $ 370, you may be able to pay off the loan in 5 years assuming a fixed rate of 4%. If you can’t afford more than $ 200 a month on the same loan, you’ll either need to take out a smaller loan or repay over a longer period of time. It’s all a balancing act between what you need, what is offered to you, and what you can afford.
