When you take out a personal loan, you are going to have to consider both how much your monthly payments will be and what your loan is going to cost you over time. Thinking about these issues will help you determine if the loan is affordable and if it makes sense for your finances.
There are three primary factors that impact the amount you will end up paying for your personal loan. Here's what they are.
1. The amount you borrow
The amount of money that you borrow plays a huge role in how much you pay each month and over time. Obviously, the higher your loan balance, the larger the monthly payment that will need to come out of your checking account -- and the more total interest you will pay over time.
Say, for example, you borrow $5,000 at 10% for five years. Your monthly payment would be $106 and total interest paid would be $1,374.11. But if you upped the amount you borrowed to $10,000, your payments would go up to $212 and total interest costs would climb to $2,748.23.
Since the amount you borrow has such a big impact on what you pay each month and over time, you should try not to borrow any more than you absolutely must to accomplish your goals.
2. Your interest rate
Interest rate also impacts the monthly payments and total costs you'll face when you're repaying your personal loan.
Remember the example above of the $5,000 loan at 10%. If that loan was instead at 5%, your monthly payment would be $94 and total interest paid would be $661.37. If it was at 15%, though, you'd be looking at a $119 per month payment and total interest costs of $2,136.98.
Since interest rate changes also have a dramatic effect on costs, it's worth trying to get the best rate you can. You should shop around with different lenders to try to make sure you're being offered an affordable loan.
If your credit score isn't great, you may also want to try to find a cosigner who is willing to guarantee your loan as this could help you qualify for a more affordable loan. Remember your cosigner would be responsible for the debt if you don't pay, so be sure you're 100% committed to covering loan payments if you take this approach.
3. Your loan repayment term
Finally, the length of time you pay on your loan will also affect both monthly and total costs. If you changed the repayment term on your $5,000 loan at 10% to being repaid over 10 years instead of five, your monthly payment would be lower at $66 per month but total interest over the life of the loan would be much higher at $2,929.04.
Try to choose the shortest payoff time that comes with affordable payments so you can keep total borrowing costs down.
Ultimately, you should consider all three of these factors so you can make the right choice about which loan is best, given both total borrowing costs and the amount you'll have to pay each month.
