Loan calculations are a task well-suited for a computer program since they involve calculating a series of mathematical formulas. A program is faster than a person with a manual calculator and far less likely to make mistakes, especially with more complex loans. Furthermore, these calculations require the use of functions that may not be available on the most basic calculators.
Rate Finder Calculations
All calculations involving compound interest are based on the formula:
F = P (1 + I) ^ N
F is the value of the loan at the end of its term. P is the loan’s present value, also known as the principal. N is the number of compounding periods in the term of the loan, and I is the interest rate for the compounding period. However, you will usually need to make some conversions before you can perform this calculation, since the interest rate is typically provided for a different length of time than the compounding period. In particular, interest rates are typically given as the annual interest, while the interest for most loans is compounded monthly.
Assume for this example you are borrowing $200,000 at an annual interest rate of 6.5 percent with a loan term of 30 years, and you wish to calculate the future value of the loan. The base formula is F = P (1 + I) ^ N, where P is $200,000. The interest rate of 6.5 percent needs to be divided by 100 to convert it from a percentage to a decimal value. Furthermore, this quotient needs to be divided by 12 to convert the annual interest rate to the interest rate for the compounding period of one month. I is therefore 6.5/100/12, or about 0.005417. A 30-year loan compounded monthly means there are 12 x 30 = 360 compounding periods in the term of the loan, which is the value of N.
The complete formula for calculating the future value of this loan is F = P (1 + I) ^ N = $200,000(1 + (6.5/100/12)) ^ 360 = $1,398,359.60. In other words, the future value of this loan will be nearly seven times its principal. Many other formulas can be derived from this basic equation. For example, the payments on a loan can be calculated with the formula A = P I ((1+I) ^ N) / ((1+I) ^ N-1) where A is the payment.
The formulas used to calculate loans are comparatively straightforward since they only require a few parameters. For example, you can calculate the future value of a loan and the payment amount with only the principal, annual interest rate and number of monthly payments. However, additional factors can complicate this calculation considerably.
The basic interest formulas discussed in the previous section assume the payment period is equal to the compounding period. This is usually the case, as the payment period and compounding period of most loans is equal to one month. However, these factors can be very different, which requires a more complex calculation. Most loans in the United States use the standard amortization method, which is the assumption of the formulas discussed here. However, a loan can use various other amortization methods, such as fixed principal, interest only and the Canadian amortization method.
Loan Calculators at Magilla Loans
Complex calculations can make an already complicated process more difficult. To make things easier for you, Magilla Loans provides three helpful tools: the mortgage calculator, debt-to-income calculator and business loan calculator.
The amount of a mortgage loan is typically greater than just the price of the house due to a variety of other charges. In addition to the parameters required for any loan, the mortgage calculator also considers factors specific to mortgages, such as property tax, property insurance and private mortgage insurance. It also allows you to enter a down payment, which is directly deducted from the principal. Many home mortgages include property taxes for the first year, so the buyer does not need to worry about this issue immediately after buying a house. Lenders also require buyers to have property insurance and PMI, which will typically be added to the loan.
Your debt-to-income ratio is your total debt divided by your total income, which is also commonly used in home loan refinancing. In other words, it is the percentage of your income you are using to pay debt. The Magilla Loans debt-to-income calculator uses gross monthly income as the income figure. It also includes various types of debt, such as the mortgage or rent payment, minimum credit card payments, other loan payments and alimony. Any other debts should be entered as a total in Miscellaneous Payments.
Business Loan Calculator
The business loan calculator is useful if you are using a rate finder or looking for ways to get funding for your new business. It uses the same basic information as any loan calculator, but it also includes parameters specific to business loans. These factors include making a payment larger than the required minimum and adding an extra payment during the year.
Find the Right Lender with Magilla Loans
These calculators will help you determine if you can afford a loan, whether it is a real estate, home or business loan. The most important factors to consider when making this decision include the monthly payment for the loan and your debt-to-income ratio while making payments.
Magilla Loans offers a search engine for loans that connects borrowers with lenders. It allows borrowers to find and compare loans without providing personal information such as name, phone number and social security number. The search engine presents proposed loans on the patented MagChart™, which allows borrowers to easily compare and select a lender. Get started with Magilla Loans today to find out more about how we can help you secure your next loan.