How To Compute Loan Interest Rates From Different Banks

When getting money from a bank or financial institution, the first thing you do is calculate the loan interest. Most people, however, still end up paying more than they should. Here’s why.

While processing fees may vary from one bank to another, how it’s paid is basically the same, meaning the processing fee is deducted from the total loan amount you’re getting.

How To Compute Loan Interest Rates From Different Banks

Simply put, if you applied for a P50,000 loan amount with a corresponding P2,500 processing fee, your take-home loan amount will be P47,500.

Read: The Key To Getting Your Loan Approved: Keeping The Six Ps Of Borrowing Money In Mind

But how about if, say, you have to choose between these two options:

  • Bank A: Offers a loan that has a processing fee with a low interest rate
  • Bank B: Offers a loan with no processing fee, but with a higher add-on interest rate

Which one will yield a higher monthly and total payment? Which one has a higher monthly effective rate?

The verdict

Going for a loan with a processing fee may cost you more than a bank loan with a higher monthly interest rate.

Following the table below, you will see that calculating your total monthly amortization early on will save you from paying more for the loan you applied for.

For personal loans, use this to calculate the add-on interest rate for your chosen term.

Loan term Bank A Bank B
Principal                           P50,000                        P50,000
Loan tenor                                          12                                      12
Add-on interest rate 1.33% 1.60%
Processing fee P2,500 0
Total amount received P47,500 P50,000
 Month Monthly payment  Monthly payment
0 P2,500
1 P4,832                                P4,967
2 P4,832                                P4,967
3 P4,832                                P4,967
4 P4,832                                P4,967
5 P4,832                                P4,967
6 P4,832                                P4,967
7 P4,832                                P4,967
8 P4,832                                P4,967
9 P4,832                                P4,967
10 P4,832                                P4,967
11 P4,832                                P4,967
12 P4,832                                P4,967
Total payment made                           P60,484                        P59,604
Principal amortization                              P4,166.67                          P4,166.67
Add-on rate                                 P665                              P800
Total amortization                                    P4,832                                P4,967

Read: All Your Hard Questions About Personal Loans, Answered

From this table you can very well see that:

  • Longer loan terms may involve smaller monthly payments, but the total interest will cost you more over time. It’s important that you consider your personal financial standing when calculating your total monthly amortization.
  • You may opt for a shorter loan term of up to 12 months, granted that you won’t have any trouble paying the monthly payment on time. Miss a payment date, and you’ll accrue a late payment fee.
  • The sample loan calculation provided above is pretty simple. It will help you know which loan type is better, and whether or not you can maintain the monthly payment. It’s the best way to decide which loan deal is better for you.