Personal Loan Calculator

Calculating Personal Loan Costs & Payments

Personal loans are commonly used for debt consolidation, home improvement projects, or major unexpected expenses. Before borrowing, it is critical to calculate the total repayment obligations and know how the upfront lender fees affect your true borrowing rate.

What is an Origination Fee?

Many personal loan lenders charge an upfront fee called an origination fee (typically 1% to 8% of the loan amount) to cover the cost of processing and underwriting. This fee is usually deducted directly from your loan payout, meaning you receive less cash in hand than the amount you borrow, although you are still responsible for paying interest on the full amount.

Understanding APR (Annual Percentage Rate)

The nominal interest rate only represents the basic cost of interest. The Annual Percentage Rate (APR) reflects the true annual cost of borrowing because it includes both the interest rate and any prepaid financing fees (such as the origination fee).

Mathematically, the monthly APR rate $$r_{apr}$$ is solved by finding the discount rate that equates the net loan payout (the actual money received) to the present value of all future monthly payments:

• $$\text{Net Payout} = \sum_{t=1}^N \frac{P_{monthly}}{(1 + r_{apr})^t}$$
• $$\text{APR} = r_{apr} \times 12 \times 100\%$$

Since origination fees reduce the net cash you receive while keeping your payments the same, the APR will always be higher than the stated interest rate if fees are present.