Credit Loan > Loan Calculator > Loan Calculators: Not Out of the Goodness of Their Hearts

Utilizing a Loan Calculator

If you need to borrow money for any reason -- a new house, a new car, school, debt consolidation, emergency medical bills, etc.,-- it is vital to do as much research as you can before you start the process. Some of the important steps include finding out your credit score, downloading a loan calculator and using it.

This is not meant in anyway to be unkind to the lending industry (after all, I might need them someday), but unless they’re relatives, they are in the business to make a profit. That’s how the system works. Financial institutions invest money in ways that in the end will turn it into more money. One of the ways to do this is to loan it out and charge interest.

That isn’t to say that lenders can charge any interest rate they want. If rates are too high, no one will borrow and the money just sits there, staying exactly the same. At the same time, because there is an amount of risk involved every time money is lent -- the borrower may run off and join the circus under an assumed name and default on the loan -- an interest rate needs to be charged which offsets this risk and makes a profit.

What that rate must be varies from borrower to borrower. Everyone has different credit, collateral and finances. A person’s credit rating is based on her debt-to-income ratio, borrowing history, the type of debt they have and whether they have consistently repaid loans in the past, among other things. The different credit rating companies will value each aspect differently, as will a lender, but a potential borrower can take the average and get a good feel for what is likely to be offered when she goes in for a loan.

A loan calculator, along with knowledge of one’s credit score, will enable the borrower to determine what type of interest rate she is most likely to qualify for -- this can be an advantage if the interest seems too high; one can negotiate or walk away. It will also show her things like the most probable repayment terms, what percentage of each payment is likely to be principle versus interest, and can help show what areas of debt, such as credit cards, are negatively impacting the rate.

Applying a loan calculator to one’s potential loan will also help to provide a realistic dollar figure regarding exactly how much can be borrowed. It will indicate what percentage of the borrower’s paycheck will need to be put towards paying off the loan over its term. This is the most helpful aspect, as it can let one know whether or not this is really the best time to borrow.