Know the numbers being agreed upon
For this calculation, we need three factors: 1) How much do we need to borrow (the principal)? 2) What is the interest rate percentage? and 3) How many months do we have to pay it off (the term)?
Using my personal loan, the simplified loan agreement will look like this: $4000 at 17.85% for 54 months.
Make sure to have these three numbers available before continuing further. We will need these numbers to calculate the other steps.
It's normal for institutes to run a credit check before providing an interest rate, but NEVER agree to a loan if the interest rate is not presented upfront at the time of the agreement. The higher the interest rate, the more you'll end up being charged in addition to the original price borrowed.
Also, make sure that early payoffs are not penalized. If you are on a 60-month agreement and you pay it off in 50 months, you don't want get charged any additional fees! Yes, there are places that will charge you for paying a loan off early because that's money that they won't be getting in the long run. Some agreements won't allow for early payoffs at all. You want to be able to pay a loan off as soon as possible because as you will see in later lessons, a daily charge can add up substantially over time.
Don't forget to print out the handy worksheet to go along with each step!