Loan Calculator

How Loans Work

A loan is basically someone else's money that you get to use now, but you've got to pay it back later with a bit extra (that's the interest). Think of it like borrowing a tenner from a mate, except banks are much less forgiving if you're late with repayments.

Your monthly payment is split between two things: paying back the actual money you borrowed (the principal) and paying the cost of borrowing it (the interest). Early on, most of your payment goes to interest, but as time goes on, more goes towards the principal.

The Key Bits You Need to Know

• Principal: The actual amount you're borrowing
• Interest Rate: What the lender charges for letting you use their money
• Term: How long you've got to pay it back
• APR: The real cost including all fees - this is the number to focus on
• Monthly Payment: What comes out of your account each month

What Affects Your Interest Rate

Lenders basically want to know: "Will this person pay us back?" Here's what they look at:

• Credit Score: Your financial report card - higher scores get better deals
• Income: Can you actually afford the payments?
• Debt-to-Income Ratio: How much of your income already goes to other debts
• Employment History: Stable job = lower risk
• Loan Purpose: Car loans are safer than personal loans (they can take the car back)

Different Types of Loans

Not all loans are created equal. Here's what you're likely to encounter:

• Personal Loans: Unsecured, use for anything, typically 3-12% interest
• Auto Loans: Secured by the car, usually 2-8% interest
• Business Loans: For business expenses, rates vary wildly
• Student Loans: Special government rates, often deferred payments
• Secured vs Unsecured: Collateral = lower rates but higher risk

Loan Term Length Trade-offs

This is where most people get it wrong. Longer isn't always better:

• Short-term (1-3 years): Higher monthly payments but way less total interest
• Medium-term (3-7 years): Sweet spot for most people
• Long-term (7+ years): Lower payments but you'll pay loads more overall

Example: £10k at 8% for 3 years = £313/month, total £11,264. Same loan for 7 years = £153/month, total £12,812. You save £160/month but pay £1,548 more!

How to Get Better Rates

Here's how to save yourself some serious money:

• Fix your credit first: Pay off credit cards, check for errors
• Shop around: Rates can vary by 2-3% between lenders
• Consider secured loans: Use collateral if you've got it
• Go shorter if you can: Higher payments, lower total cost
• Time it right: Don't take the first offer you see