The 3 things to know:
- Before applying for a loan, it is useful to calculate the amount of the installment in advance
- The TAN and the APR : elements that deeply affect the value of the installment
- Calculate the rate of your loan online and choose the type of loan that suits you best
Calculating an installment loan
When requesting a loan it is useful to calculate the amount of the installment in advance. Not only to understand if it is sustainable with respect to your monthly income, but also to compare multiple proposals and choose the best loan.
To perform the calculation, in addition to the sum that you want to request, you must also know the value of the TAN (Annual Nominal Rate), that of the APR (Annual Global Effective Rate) and the total number of installments or their frequency.
Variables that affect the installment
These are the elements that contribute to the calculation of the installment and can change in value. This is the TAN, an acronym for Nominal Annual Rate, which represents the share of interest applied by the bank to the loaned money, and the APR (Annual Global Effective Rate).
The APR is an indicator that expresses the total cost of a loan because it also includes all the expenses and charges to be paid. Such as, for example, the costs of the investigation, opening, management and closing of the loan and any insurance costs. Usually, in the case of loans, the taxes to be paid for the stipulation of the contract, default interest and any legal fees for the forced recovery of the credit are excluded from the APR if the installments are not paid.
The APR is the most important variable to compare different solutions because, with the same TAN , the loan with the lowest APR will surely be the most convenient.
TAN and APR may differ from bank to bank. For the purposes of calculating the installment, the total number of installments can also be considered variable.
Methods to calculate the loan installment
The fastest and safest method is to use the internet after having found, through a search engine, one of the many sites that have an automatic calculator. Just enter the required data, ie loan amount, duration, interest rate, frequency of installments (for example, monthly, quarterly, half-yearly), to calculate the amount of the installment.
At the interest rate item it is advisable to enter the value of the APR to obtain an installment that also includes all the additional expenses.
As an alternative to automatic calculators, the installment can be determined using Excel, which has a special template that can be downloaded from the web, in which the calculation table is first set up and then the required data is entered (the amount, the duration of the loan , number of installments and interest rate).
Finally, those who are familiar with mathematics can use the algebraic formula also available on the internet through a search engine.
Example of loan installment calculation
Suppose the loan amounts to 10,000 euros, repayable in five years with monthly installments and the APR applied is 12%. By entering these values in the automatic calculator, you will have a monthly payment of 222.44. While the total cost of the loan is 13,346.67 euros, of which 3,346.67 are interest.
To compare instead the convenience between different solutions, for the same TAN, just look for the offer with the lowest APR. In the previous example, if the APR had been 11%,
The installment would have been € 217.42 for a total cost of € 13,045.45 and the interest paid would be € 3.45,45. Taking into account the two values of the APR, one sees by eye and without making calculations that the second proposal is the most palatable.