What term of loan should I choose?

Inputs

Loan amount

Federal tax rate

State tax rate

		Loan 1			Loan 2

Interest rate

Loan term in months

This calculator calculates monthly payments, total interest expense, and tax savings for two fixed-rate term loans. Tax savings are deducted from total payments to calculate net payments.

Since interest expense is tax-deductible, the after-tax interest rate should be looked at when evaluating a loan.

Generally, a loan with a longer term has a higher interest rate than one with a shorter term. The higher interest rate is to compensate lenders for tying up their funds longer.

After-tax interest rate:After-tax interest rate is the effective interest rate you pay on a loan if you deduct interest expense. For example, if you have an 8% loan and are in the 25% tax bracket, the after-tax interest rate is 8% multiplied by (1 minus 0.25), or 6.00%.

Amortization:Amortization is the gradual reduction of loan principal that occurs as you make periodic loan payments. Generally, the loan principal is completely amortized with the final payment. As you pay back the loan, an increasing amount of each payment is applied to principal and a lesser amount is applied to interest. Amortization is also a process of spreading a cost that is incurred upfront over the term of the loan or life of the asset.

Principal:Principal is either the original amount of your investment or loan. In the case of an investment, principal is also called your investment capital. In the case of a loan, principal is also called the loan balance.

Tax savings:Tax savings are the amount you may save in taxes from a tax deduction or tax credit. Tax savings are also called a tax shield. To calculate tax savings from a deduction, multiply the amount of the deduction by your marginal income tax rate. For businesses, tax savings are realized on such deductible expenses as lease payments, interest on loan payments, and depreciation expense. Example: At a marginal business income tax rate of 25%, an increase of $2,000 in depreciation expense may save you $500 in taxes or $10,000 in operating lease payments may save you $2,500. You may wish to consult a financial or tax adviser.

Tax-deductible:A tax-deductible expense or contribution reduces your taxable income. To calculate the worth of a tax deduction, multiply the deduction by your income tax rate. For example, if you deduct $10,000 in mortgage interest expense and are in the 25% income-tax bracket, the tax deduction is worth $2,500. If you deduct $1,000 in contributions to a charity, the tax deduction is worth $250.