If for instance, one needs to borrow a personal loan of $8,000, then the most common question that arises entails determination of the monthly payments. The answer lies in several factors that influence the total amount of a personal loan including the amount of monthly payments. This blog post will outline the steps to follow in coming up with a rough idea of the approximate monthly payment you could make on a $8,000 personal loan.
Interest Rate
The actual monthly loan payments depend on the interest rate as the key factor causing variations in the payments. Conventional interest rates for personal loans can be as low as 5% up to a maximum of 36% depending on the credit score and credit history of the borrower, the specific lender offering the personal loan, the term of the loan, and others. As a general guideline though:
- For scores ranging from 720 and above, the mark can afford rates as low as 5-15% of what is being borrowed.
- Credit between 680-719 is in the good credit score range and can make you be offered rates of 15-25%.
- Poor credit rating (550-619) makes you eligible for 35%+ while Fair/Average (620-679) for around 25-35%.
The credit scores act as a benchmark, the better the credit scores the better the interest rate is offered on the loan. This is especially true if you’re in a position to obtain a rate below 10 percent as this entails very good credit. This makes it easy to realize that even a few percentage points in the interest rate may mean several hundred dollars toward the monthly installments for the entire tenure of the loan.
Loan Term Length
The tenure of the loan or the period of the loan shall also determine the monthly payment that you are expected to make. Personal loan tenure is usually from 1-7 years in most cases depending on the lenders. Some key options are:
- 1-year loan term
- 3-year loan term
- 5-year loan term
- Short term of about 6-7 years
When you take a short-term loan of repaying between one to three years, then the monthly repayments will be higher since the $8,000 principal amount will need to be repaid within the specified period. However, you will be charged a smaller interest amount in the long run because the interest rates will be spread out to match the loan period.
Prolonged 5-7-year period loan repayments have fewer monthly installments but attract higher total interest charges within the extended period. Thus, the best idea is to choose the shortest term that you can manage with your current financial conditions and income. This reduces interest charges over the long run.
Upfront Fees
Some forms of personal loans also attract origination fees or application fees which are charged when you secure the loan. These normally come at a rate of 1% to 6% of the total of the loan amount. Therefore, in the context of an $8,000 loan amount, the upfront fees may range from $80 to $480 should the lender choose to charge this. These are additional costs that you end up paying when you incur the fees in addition to the actual loan amount before taking the cash advance.
The loan origination fees paid at the beginning would also form part of the total loan principal amount. For instance, if there is a 5% upfront fee, the amount that is credited to the borrower is $8,000 – $400 = $7,600. However, the monthly installments you pay are exercised with the assumption of repaying the full $8,000.
Credit Score and History
As was mentioned above, the credit score and the credit history determine a lot when it comes to interest rates that are offered on a personal loan. Differences in your credit score can be as little as 100 points, yet you will be saving thousands of dollars in interest rates. For example:
Excellent Credit Interest Rate Example:
720+ credit score and they are offered a 10% interest rate on a 5-year $8000 personal loan = $156 monthly payment.
Fair Credit Interest Rate Example:
640 credit score 25% interest rate on a 5-year $8,000 personal loan equals a $212 monthly payment.
You can see how much is over $ 50 per month potential savings and a 15% interest rate just because of excellent credit compared to fair credit. Then again, the addition of excellent credit saves the borrower $2,736 in total cost over the five-year repayment period. There is much difference in terms of monthly as well as total savings if one manages to attain a better credit score before going for personal loans.
Debt-to-Income Ratio
Lenders also take a close look at your DTI when considering your loan application as well as the loan approval you receive. This compares your present monthly obligations with your total gross income for the month. What matters most is that most lenders restrict the maximum DTI level below 50% for personal loan approval. Meaning that the total of your monthly expenses for debts should not exceed half of your total monthly income.
If your DTI is high because of high existing credit like credit cards, auto loans, student loans, etc - then lenders may reject your application for a $8,000 personal loan. Or only grant you a short-term loan or at a higher cost due to risk. When possible, it is therefore important to keep the DTI lower since it gives you the leverage of getting affordable loan rate offers. If your DTI is too high at present, then it can be wise to eliminate debts first before pursuing other forms of lending products.
Run the Numbers
If you’re considering personal loan offers of $8,000 or higher, whether through credit unions, banks, or online lenders, be strategic in your calculations. Compare the monthly installments with the overall sum to be paid back within a given period of the quoted rate of interest. It is possible to use the internet to find most of these lenders and they offer free personal loan calculators to help with the estimations.
Include any charges such as one-time origination fees that are to be subtracted from the total amount received from the loan but will still be factored in the total costs of repaying the loan. Always read all loan details carefully when in the process of getting a loan and don’t hesitate to ask the loan officer if something is not clear to you before signing it.
These totals can pile up month after month on a 3-7-year personal loan. Choose the cheapest option exclusively after you calculate the real monthly and the overall price your budget will have to bear.
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