The total cost of credit

by Sharon Garcia

With these data, it is possible to establish the schedule of your repayments. This is called the amortization schedule of your loan. This document is obligatorily attached to the loan offer. It indicates the amount owed by the borrower at each maturity by detailing the distribution of the repayment between: the principal, the interest, the borrower insurance contribution and the capital remaining due after each monthly payment. In the case of a variable rate loan, it will only be possible to draw up an amortization schedule if the different interest rates and their date of application are established from the outset. But if the rate is indexed to uncertain data such as general interest rate developments, it will be impossible to establish the depreciation schedule that will actually apply.

The overall cost of your loan is equal to the difference between the total monthly payments (plus fixed costs) and the amount of the loan. This overall cost must be communicated to you by your banker.

This essential data is not the only criterion of choice. The financial burden you will have to pay at each term, what it will weigh in your budget is also an important factor in the decision. Never forget that the expenses of a credit are constrained expenses, fixed expenses in your budget. Alas, the credit that has the least overall cost is not necessarily bearable for your budget. You have to take into account these different dimensions, partly contradictory, to define the amount you can borrow, the repayment term and the interest rate you can get.

For example, choosing a longer term for a mortgage (for example 20 years instead of 15) usually leads to paying a generally higher interest rate for a longer time. The overall cost of credit is higher. But monthly payments are lower. If you set a priority goal of not exceeding a monthly financial burden limit, you can borrow more.

An encrypted example

An encrypted example

Hypothesis B: The amount of the loan is the same as in the hypothesis A. The credit is extended by 5 years. The interest rate is 0.2% higher. The cost of credit increases by 44% but monthly payments decrease by almost 15%. Assumption C: The credit is extended by 5 years compared to hypothesis A. The interest rate is 0.2% higher. The amount of monthly payments is stable (at $ 1,600). The overall cost of credit is 64.5% higher, but the amount of the loan is increased by almost 15%!

The repayment terms

The repayment terms

The method generally used is that of periodic repayments of a constant amount. This is most often monthly payments. All simulations provided by our calculator are based on this assumption. To measure the benefits, one can make the comparison with different methods of reimbursement. An amount of $ 50,000 over 4 years borrowed with an overall interest rate of 9%. Suppose for simplicity that payments are made by annuities.

The overall cost of credit is significantly higher (+ 50%) because the interest covers the entire capital for the entire period. However, this formula can be useful in two cases: when the borrower anticipates a cash receipt the year of the end of his loan, or if he can save himself the sums he will not have to pay. every year and if he can place them with a sufficient return (equal to or higher than the additional cost of the loan).

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