Those looking for a personal loan online or offline are attracted above all by the amount that can be obtained through the loan. The advertisements and communications of the loans also communicate the amount that can be financed and the number of installments, but never the actual cost of the loan. Let’s find out how the cost of a personal loan is calculated.
What the monthly payment depends on
Let’s start with the most obvious expense related to the cost of personal loans, namely the monthly payment . This is the most obvious cost for those who must repay the loan, as it is the amount that is paid periodically (usually every month) to meet the loan received. But what does the monthly payment depend on? The value of the installment is a figure that varies as a function of the ‘amount paid, the interest rate applied and the duration of the loan period. In summary, the installment is calculated by adding the amount disbursed to interest and dividing the amount obtained by the number of installments (but we will cover other cost items that affect the installment in the next paragraph).
The installment therefore increases in value as the time of repayment decreases and the amount paid increases, as it is higher with higher interest rates.
As for the details of the calculation of the installment and of the amortization plan, we refer to the detailed guides on the site.
The amount of the first installment
It should be noted that usually the cost of the first installment of a personal loan is higher than that of the other installments included in the amortization plan . This is because, as a rule, any costs for opening the financing procedure are applied to this installment. The amount and application of this cost varies from loan to loan; therefore, we recommend that you always keep up to date on any additional costs related to the personal loan you are about to underwrite.
The calculation of interests
As anticipated in the previous paragraph, the amount of the monthly payment is also influenced by the interest rate applied. But what is interest? This term indicates the additional percentage to be paid on the amount received, as a cost for the loan itself. With regard to personal loans, the value of the interest applied is very variable and can change considerably depending on the product chosen. Returning to the definition of interest, according to the financial formula its value is given by the multiplication of the capital (ie the amount disbursed), for the rate applied , for the time (in years), the whole divided one hundred.
For example : we assume that a person has requested a personal loan of 5,000 euros, at the rate of 5% to be repaid over 4 years. The (simple) interest will be given by (5,000 x 5 x 4) / 100 = 1,000. This means that at the end of the loan, 1,000 euros will be paid as interest.
Attention : the example just shown represents the calculation of the simple interest; to get details on the specific way of calculating interest for personal loans, we refer to the in- depth analysis on the site.
The additional costs of a personal loan
We have previously seen how the monthly payment is calculated. In reality, the cost of personal loans is not limited to the installment calculated according to the methods explained. In fact, the monthly cost can be higher as additional costs can be applied. The most common is that due to the collection costs of the installment, but there may be other different costs, such as the periodic costs of managing the loan. Another cost item that affects the amount of the monthly payment is given by the loan insurance , the total amount of which is usually spread over the number of installments. It should be noted that the amount of insurance is usually quite small; however it affects the amount of the monthly payment. Finally, please note that the taking out of personal loans insurance is always optional .