Personal Loans: How to Calculate the Installment and Choose the Best

What is a personal loan and how does it work?

A personal loan is a financial product through which a banking or financial entity makes a certain amount of money available to the client, which the client agrees to return in periodic installments along with the corresponding interest. Unlike a mortgage, a personal loan does not require real collateral (such as a home), although it usually has higher interest rates precisely because of the greater risk for the lender.

Personal loans are used to finance everything from the purchase of a vehicle or appliances to home renovations, travel, studies or the consolidation of other debts. Before ordering one, it is essential to calculate how much it will actually cost you. With the Loan Calculator With GlobalTool you can simulate any scenario in a matter of seconds.

How the payment of a personal loan is calculated

The vast majority of personal loans use the French amortization system, where the monthly payment is constant. The formula is the same as for mortgages:

Where C is the requested capital, r is the monthly interest rate and n is the total number of installments. For example, a loan of €10,000 over 5 years (60 months) with a TIN of 7% would give a monthly payment of approximately €198, paying a total of €1,880 in interest alone.

To see the full breakdown, use the Loan Calculator and enter your details. The amortization table will show you exactly how much of each installment goes to principal and how much to interest.

TIN vs. APR: understand what you really pay

The confusion between TIN (Nominal Interest Rate) and APR (Annual Equivalent Rate) is one of the biggest problems for consumers:

Concept	TIN	APR
What does it include?	Only nominal interest	Interest + commissions + expenses
What is it for?	Calculate the fee	Compare offers
Which one is bigger?	Always less than or equal to the APR	Always greater than or equal to the TIN

When comparing loans, always look at the APR, since it is the only figure that allows you to make a homogeneous comparison between different offers. If you need to convert between nominal and effective percentages, the Percentage Calculator It will be helpful to you.

Key factors to choose the best loan

Not all personal loans are the same. These are the aspects you should pay attention to:

• TAE: The lower it is, the less you pay. Be wary of offers with very low TIN but hidden commissions that increase the APR.
• Opening commission: It can range between 0% and 3%. Always include it in your total cost calculation.
• Early repayment fee: If you plan to repay the loan early, this fee can reduce or negate your interest savings.
• Return period: A longer term reduces the payment but increases the total interest paid. Find the right balance.
• Related products: Some banks require direct deposit of payroll, insurance or cards to offer better conditions.
• Flexibility: shortcomings, the possibility of modifying the deadline or pausing installments can be very valuable in the event of unforeseen events.

When it makes sense (and when it doesn't) to take out a loan

A personal loan is a tool, not a magic solution. It makes sense when:

• You need to finance something that will generate long-term value (studies, vehicle to work, renovation that increases the value of your home).
• You have ample capacity to repay the installments without committing more than 30-35% of your income in total debt.
• The interest rate is reasonable compared to the return you will get from that investment.

It doesn't make sense when:

• You finance current expenses or whims that you could cover by saving a few months.
• You are already over-indebted and the loan only aggravates the problem.
• You have not compared at least three different offers.

For a comprehensive view of your home finances, including debt, savings and investing, check out our guide on personal finance planning. And if you are interested in understanding how interest can work in your favor when investing, read about the power of compound interest.