Calculating the Cost of a Short-Term Loan: A Simple Formula

May 5, 2025
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Short-term loans can be a lifeline when unexpected expenses arise. From a car repair to a medical bill, or an urgent home repair, these loans provide quick access to funds.


However, understanding the true cost of borrowing is crucial before signing any agreement. This article will demystify the process of calculating the cost of a short-term loan, empowering you to make informed financial decisions.


Understanding Short-Term Loans


Short-term loans are designed to provide temporary financial assistance, typically repaid within a few weeks or months. They often come with simpler application processes compared to traditional bank loans, making them accessible to a wider range of individuals. However, this accessibility can come at a higher cost. 


Key Components of Loan Cost


To accurately calculate the cost of a short-term loan, you need to understand the following key components:


  • Principal amount. This is the original amount of money you borrow.
  • Interest rate. This is the percentage charged on the principal amount, expressed as an annual percentage rate (APR).
  • Fees. These can include application fees, origination fees, late payment fees, and other charges.
  • Loan term. This is the duration of the loan, usually expressed in days, weeks, or months.


The Simple Interest Formula


For many short-term loans, especially those with fixed interest rates, the simple interest formula can be used to calculate the total interest payable. The formula is: 


Interest = Principal × Rate × Time


Where


  • Interest = the total interest payable
  • Principal = The original loan amount. 
  • Rate = The annual interest rate (APR) expressed as a decimal.
  • Time = The loan term expressed in years.
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Example Calculation


Let’s say you borrow $1,000 for 3 months at an APR of 36%. To calculate the interest, we first need to convert the loan term to years:

  • 3 months / 12 months = 0.25 years

Now, we can plug the values into the formula:


Interest = 1,000 × 0.36 × 0.25


Interest = 90


Therefore, the total interest payable on the loan is $90. To find the total repayment amount, add the interest to the principal:


Total Repayment = Principal + Interest


Total Repayment = $1,000 + 90


Total Repayment = $1,090

Accounting for Fees


In addition to interest, many short-term loans come with various fees. To calculate the total cost, you must include these fees. For example, if the loan has a $50 origination fee, the total cost would be: 


Total Cost = Interest + Fees


Total Cost = $90 + 50


Total Cost = $140


Therefore, the total cost of the loan, including interest and fees, is $140.

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Understanding APR vs. Interest Rate


It’s crucial to distinguish between the interest rate and the APR. The interest rate is the percentage charged on the principal, while the APR includes the interest rate plus any fees or other charges, expressed as an annual rate. The APR provides a more accurate representation of the loan’s true cost. 


Factors Affecting Loan Cost


Several factors can affect the cost of a (traditional) short-term loan:


  • Credit score. A lower credit score may result in higher interest rates or fees. So when possible, opt for no-credit-check payday loans instead. 
  • Loan amount. Larger loan amounts typically come with higher interest costs. 
  • Loan term. Longer loan terms may result in higher total interest costs. 
  • Lender. Different lenders have different interest rates and fees.


Exploring Loan Options


When considering a short-term loan, explore various options and compare different lenders. Understanding how to get a loan online will allow you to find various lenders and loan products from the comfort of your own home.

For those who need a longer repayment period, fast cash installment loans offer the ability to repay the loan in scheduled payments.


Responsible Borrowing


Short-term loans should be used responsibly and only when necessary. Before taking out a loan, consider the following:


  • Assess your needs. Determine if the loan is truly necessary and if you have other options.
  • Create a budget. Ensure you can afford the loan repayments within your budget.
  • Read the loan agreement. Carefully review the loan agreement, including the interest rate, fees, and repayment terms.
  • Avoid rollovers. Rollover loans can lead to a cycle of debt. 


Payment reminders. Set up payment reminders to avoid late charges.

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Remember to factor in any fees and compare different lenders to find the best option for your needs. Short-term loans can be a lifesaver in the face of unexpected expenses, but as with every opportunity, they should be used after careful consideration.


For personalized assistance and to explore various loan options, contact Brokers Lamina today at 1-844-356-5097.