Credit Karma is obviously known for its free credit scores, but you probably did not know all the other services they offer. They also give you tips to help with your financial future, tell you how to improve your credit score, and offer a simple loan calculator that you can find on their site.
The Credit Karma simple loan calculator helps you determine your estimated monthly loan payments as per the interest rates and other terms you have been issued. All you have to do is to input the details about your loans and Credit Karma will take care of the calculations.
Additionally, they provide you with an amortization table that shows the gradual reduction of your debt over the given period. This can be extremely helpful for people who are trying to wrap their heads around their large loans.
Now, what you need to understand is that all loans have two sections; the principal and the interest. Most people never know how much interest they pay or how much of the principal they pay. The amortization table takes care of that, by showing you the amount you pay for each.
Loan Repayment Formula
The simplest loan formula is the following.
It is used to calculate loan payments per month. You do not need to learn it as Credit Karma does all the calculations for you. However, it is important to understand it, as you may need to make comparisons.
The PV, or Prevent Value of your loan payment in the formula makes use of your original loan amount. This loan amount will be used as the present value on all future payments on the loan.
It is important to always keep the number of periods and the rate per period consistent when using the formula. If the repayments are monthly, then the rate must be adjusted to the monthly rate and the number of periods adjusted to the number of months.
Standard Loan Repayment
The formula shown is used for a standard loan that has been amortized for a specific period at a fixed rate. There are, however, some loans that do not apply this formula such as negatively amortized loans, graduated payment loans, interest-only loans, and balloon loans.
Can The Formula Be Used For Other Loans?
Yes. This formula can be applied to any type of loan such as consumer loans, mortgage loans, and business loans. It does not differ based on the purpose of the loan, but it will differ depending on the loan terms.
Simple amortized loans generally have the same payments. The simple interest and terms amortized relate to the amount of payment that will be applied to the principal amount and how much will be applied to the interest.
Understanding the loan term means that you must answer the question of how long you will be repaying the loan. Short-term loans generally have higher repayments per month, but they also seem to have less interest in the long run.
Longer-term loans have low monthly repayments, but the cost of these loans, in interest, over the life of the loan is usually higher.
For example, if you use the Credit Karma loan calculator for a loan of $20,000, with an interest rate of 8.75% P.A., here are the calculations over 3 years and 5 years.
For 3 years – The loan repayment per month will be $633, which adds up to approximately $2,788 in interest over the 3 years.
Now let’s look at a 5-year loan term.
Loan repayment per month over 5 years will be – $412 each month, which is less than the $633 for 3 years. However, over the life of 5 years, you will have paid interest amounting to $4,720 which is almost double the amount of interest for 3 years.
That is how interest and loan payments are calculated.
The Repayment Schedule
Most lenders will give you the options to pay the loan on a weekly, fortnightly, or even monthly basis. It is wise to choose the option that will ensure you are most comfortable. Of course, the more frequent the payments, the faster the loan will be cleared.
With loans, it is always advisable that you shop around before settling on a lender. With the simple loan calculator provided by Credit Karma, you have an easy job of comparing lenders.
When they give you their terms, simply do the calculations and find out which lender has the lowest rates.