Comparing Personal Loans
This calculator can be used to compare up to five personal loans of various terms and interest rates. This calculator requires a total of six inputs, including:
- The value of the personal loan, which is how much money will be borrowed from the lender
- The annual rate of interest charged for up to five loans of terms that include 3-year, 4-year, 5-year, 7-year, and 10-year
The calculator then provides the user with three sets of data, including:
- The monthly payment associated with each of the 3, 4, 5, 7, and 10-year loans
- The total of all interest paid, or finance charges, associated with each of the 3, 4, 5, 7, and 10-year loans
- The total of all payments associated with each of the 3, 4, 5, 7, and 10-year loans
Comparing Loans of Different Terms
Admittedly, this calculator is simple and only provides three bits of information for each loan. The monthly payment being the most complex calculation, while the total paid on each loan is found by taking the monthly payment times the term (number of years) times 12 (months). Once the total paid is found, the interest paid is easy to find since it is the difference between the total paid and the amount borrowed (loan value). It’s easy to see there is no rocket science at work on this page.
Ironically, the beauty of this calculator is in its simplicity. By doing these three calculations for each loan term and putting the values side-by-side, a user can quickly gain some insight into the pros and cons of each loan. For example, it’s common for interest rates to increase as the duration, or term, of the loan increases. The finance charges, or interest rate, of a personal loan with a term of ten years will be higher than a loan of five years. This happens for a couple of reasons. The longer a loan remains unpaid, the greater the risk the borrower will not repay the loan in full. Higher interest rates compensate the lender for this risk. The other factor has to do with movements in the interest rates over time, which are much more certain in the near term than further out in time. For example, it’s easier for a bank to predict interest rates in the next three years versus the next ten years. Once again, lenders are compensated for this risk, so longer-term loans carry higher interest rates.
Interpreting the Results of this Calculator
If the amount of money being borrowed is consistent between loans, then longer-term loans offer the borrower lower monthly payments. That is the biggest benefit of choosing a repayment plan of ten years versus three years. However, since the ten-year loan will carry a higher interest rate and the loan is outstanding for a longer period, the interest paid on the loan will be higher too. The default inputs of this calculator demonstrate this point. A three-year loan of 25,000 results in around 2,300 in finance charges (at 5.750%) while a ten-year loan of 25,000 results in nearly 9,500 in finance charges (at 6.750%). The downside of the shorter loan is the monthly payment, which is 758 for the three-year loan versus 287 for the ten-year loan. Users of this calculator should carefully examine the monthly payment data along with the interest paid amounts to determine which loan provides them with the best balance of these two values.