Dollars Per Thousand Financed: A Key Lending Metric

When taking out a loan, understanding the interest rate is crucial. However, another useful metric that can help borrowers quickly compare loan options is “dollars per thousand financed.” This represents the cost of the loan for every $1,000 borrowed. It translates the interest rate and loan term into a simple, easy-to-understand figure, enabling a more intuitive comparison between different loan offers.

How is it Calculated?

The calculation is relatively straightforward. First, determine the total repayment amount for the loan (principal + total interest). Then, subtract the original loan amount (the principal) to find the total interest paid over the life of the loan. Finally, divide the total interest paid by the loan amount in thousands. The formula is as follows:

Dollars per Thousand = (Total Interest Paid / Loan Amount) * 1000

For example, imagine you borrow $10,000 and repay a total of $12,000 over the loan term. The total interest paid is $2,000. Using the formula: ($2,000 / $10,000) * 1000 = $200 per thousand.

Why is it Useful?

• Easy Comparison: Dollars per thousand allows you to compare loans of different sizes and terms directly. Instead of just comparing interest rates, which don’t account for the loan duration, this metric gives you a clear picture of the actual cost.
• Quick Assessment: It provides a quick way to assess whether a loan offer is reasonable. By knowing the typical range for similar loan products, you can instantly identify offers that seem unusually high or low.
• Budgeting Tool: Knowing the cost per thousand helps in budgeting. If you’re borrowing several thousand dollars, you can easily estimate the total interest expense by multiplying the “dollars per thousand” figure by the number of thousands you’re borrowing.
• Highlights the Impact of Loan Term: This metric vividly demonstrates how longer loan terms, even with lower interest rates, can lead to significantly higher overall costs. A longer term means more interest accrues, resulting in a higher “dollars per thousand” figure.

Things to Consider

• Fees: The “dollars per thousand” calculation typically doesn’t include loan origination fees or other upfront costs. Factor these fees into your overall loan cost analysis. While sometimes, finance companies show the costs already factored in.
• Loan Type: The typical “dollars per thousand” will vary based on the type of loan (e.g., mortgage, auto loan, personal loan). Research typical ranges for the specific loan you are considering.
• Interest Rate Type: It is important to know if the loan is a fixed-rate loan or variable-rate loan, as a fixed-rate loan will have a more predictable value, whereas a variable-rate loan can fluctuate.

In conclusion, “dollars per thousand financed” is a valuable tool for borrowers. It simplifies loan comparison, aids in budgeting, and highlights the true cost of borrowing. By using this metric in conjunction with other factors like interest rates and fees, you can make more informed borrowing decisions.