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The Loan Calculator - an Indispensable Tool

Sep 9, 2008
In this age of computerisation, it is easy to forget just how complicated are some of the calculations which we now take for granted. A prime case in point is the loan calculator - varieties of which can be found on numerous websites and which can be used to calculate, at the click of the mouse, the monthly repayments you should expect to pay on any loan, the total repayments you will make over the life of the loan, and the total amount of interest you will have paid. A very good, straight forward, no-nonsense and reliable loan calculator can be found at the official website of financial services regulator, the Financial Services Authority.

All that you need to do is enter the key facts that you are certain to know about the loan: namely, the amount of the loan; the repayment period (which is likely to be in the number of years); that annual rate of interest on the loan; and the number of repayments you will be making in the year. Then, with just one click, all the relevant cost calculations are made for you.

Given the complexity of the calculation, this is actually quite an achievement and brought to you thanks to the wizardry of computing. In fact, the calculations are pretty difficult even with the aid of a calculator and leave us asking how we managed before the age of such simple online tools as the loan calculator (the answer actually lies in the pages of tables which lenders previously used and which had to be prepared painstakingly and with a good deal of time).

To understand what is going on with such calculations it is interesting to look behind just what is involved. When you take out a loan, there is an outstanding debt which you need to repay, together with the interest on the amount of debt outstanding. This is done over a fixed number of years, at an agreed rate of interest.

The picture is complicated by the fact that although you will be making equal monthly payments throughout the whole of the repayment period, the outstanding debt is of course decreasing and, therefore, the amount of interest you need to pay on the debt is also decreasing. Since the amount of repayments stay the same, as time goes by, more of each month's payment goes towards repaying the principal of the debt and a lesser proportion towards interest payments.

The picture is further complicated, however, because the amount of interest payable needs to be compounded over the life of the loan. Because the interest due is repaid over the whole repayment period, the borrower actually effectively needs to pay interest on the outstanding amount of interest due.

In a word, therefore, there is an awful lot going on and a lot of calculations, dependent on each other, and all needing to be worked out simultaneously. It can take a lot of concentration simply to keep your mind on the various strands of the equation as it is working out over time. Indeed, so much concentration does it take that most of us these days simply go straight to the online calculator - and rely on it!
About the Author
Confused.com is one of the UK's biggest and most popular price comparison services. Confused.com helps consumers save money on everything from car insurance to loans.
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