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.
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.
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?
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|
|Add-on interest rate||1.33%||1.60%|
|Total amount received||P47,500||P50,000|
|Month||Monthly payment||Monthly payment|
|Total payment made||P60,484||P59,604|
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.