Before you take out a loan, you should make sure that you understand the true cost of the loan. Depending on various factors, the total cost of your loan as well as the monthly payments could fluctuate throughout the term. Understanding the numbers that go into calculating this figure can save you from paying more money than you originally intended.

The loan cost is the total of the interest, closing costs and various fees in addition to the amount that you borrow. Consider the following scenario. Someone borrows a $100,000 loan with a static interest rate of 6 percent and agrees to pay it back over the course of thirty years.

Throughout the first year, the borrower will make payments on the loan. The total amount borrowed will decrease each month. At the end of the year, 6 percent of the total of what is left on the loan will be tacked onto the loan total. This will happen every single year until the loan is paid off. Depending on the type of loan, interest may accumulate more or less frequently. For example, some loans accumulate twice a year or on a monthly basis rather than just once a year.

Calculating the total loan cost takes advanced, multi-step calculations. Luckily, various loan calculators can be found online for free. Most loan calculators ask for the interest rate, the term and the loan amount. After performing the calculations, the calculator will display the monthly payments or the total loan cost.

In the scenario mentioned earlier, the monthly payments would be $599.55. After 12 months of making payments, the loan would be paid down to $92,805.40. Since the interest rate is six percent, $5,568.32 would be added to the total. The borrower would now owe $98,373.72 to the lender. This process would occur annually for the next thirty years.

If the interest rate is variable instead of static, it is possible for the annually accumulated interest and consequently, the monthly payments to increase. Variable rates can increase or decrease depending upon various factors. The interest rates of home loans vary depending upon the market rate. Most other variable loans correlate with the prime rate. If you are taking out a loan with a variable interest rate, be sure to ask your lender what kind of things will cause the rate to change and how it will affect your total loan cost and monthly payments, since these features are different for each type of loan.

Additional fees may also factor into your true loan cost. Lenders charge a variety of fees, such as processing fees, closing costs, down payments and points fees. Lenders might also require that you purchase homeowners` insurance or payment protection insurance. Loan insurance is usually paid monthly, so it will increase your monthly expenses. If you are taking out a home mortgage, you will also be required to pay various property taxes.

When you use a loan to pay for costly items, you often end up paying much more than the initial price of the item. In the example scenario, the total amount the borrower would pay is $215,838.19, which is $115,838.19 more than the original loan. To avoid spending more than you intended, always use a loans calculator before taking out a loan.