Loan Comparison, Explained
After reading this you can put two loan offers side by side, count the fees, and decide which one costs you less over its whole life instead of trusting the lower monthly payment.
What this comparison actually answers
You have two offers. One shows a smaller monthly payment. The other has a lower rate but a fee up front. Which is cheaper? The monthly payment alone cannot tell you, because a lower payment often just means a longer term, and a longer term means more months of interest.
The honest question is the total cost: every payment you will ever make, plus any fee you pay to get the loan. This tool computes that number for both offers and names the smaller one.
Here is the hook. Loan A is 20000 at 8% over 5 years with no fee. Loan B is 20000 at 7.4% over 6 years with a 500 fee. Loan B has the lower rate and the lower monthly payment. It still costs you more. The worked example below shows exactly how much more and why.
When to use it, and when not
Use this when you are choosing between two fixed-rate, fixed-term installment loans: a car loan, a personal loan, a fixed-rate mortgage offer against another. It assumes both loans are fully amortizing (each payment covers interest plus some principal, and the balance reaches zero on the final payment).
Do not use it for revolving credit like credit cards, where you decide the payment each month. For that see the Credit Card Payoff Calculator or the Minimum Payment Trap Calculator. If one offer ends in a large final payment, use the Balloon Loan Calculator instead, because the formula here spreads the whole balance evenly.
Comparing two offers with different loan amounts mixes two questions: how much you borrow and how much each dollar costs. Keep the amounts equal to compare price cleanly. If the amounts differ because one lender folds the fee into the balance, use the effective APR rather than total cost to judge the rate.
The formula and the intuition
The monthly payment on a fully amortizing loan comes from one equation. Let P be the amount borrowed, r the monthly rate (annual rate divided by 12), and n the number of monthly payments.
Here M is the fixed monthly payment. The term (1+r)^n is what one dollar grows to over the loan if left to compound. The intuition: you are finding the level payment whose present value, discounted at rate r, exactly equals the amount borrowed.
From M the rest is arithmetic. Total paid on the loan is M \times n. Total interest is that minus the principal:
Total cost adds the upfront fee, because that fee is money out of your pocket to get the loan:
where F is the fee. The effective APR is the annual rate that makes the payments equal the amount you actually received. If the fee is deducted from what the lender hands you, you receive P - F but still repay based on P. The effective monthly rate r_e solves:
There is no closed form for r_e; it is found by iteration. Multiply by 12 for the annual effective APR. That single number folds the fee back into the rate, which is why it is the fairest one-number summary. For a deeper treatment of that step, see the APR from Fees Calculator.
Reproducing the demo data
Loan A: 20000, 8%, 5 years, fee 0. Loan B: 20000, 7.4%, 6 years, fee 500.
- Loan A monthly rate: r = 0.08 / 12 = 0.006667. Payments: n = 60.
- (1+r)^n = 1.006667^{60} = 1.4898.
- M_A = 20000 \times \frac{0.006667 \times 1.4898}{0.4898} = 405.53 per month.
- Total paid: 405.53 \times 60 = 24331.90. Fee is 0, so total cost is
24332. Interest is4332. - Loan B monthly rate: 0.074 / 12 = 0.006167. Payments: n = 72.
- 1.006167^{72} = 1.5563, so M_B = 20000 \times \frac{0.006167 \times 1.5563}{0.5563} = 345.05 per month.
- Total paid: 345.05 \times 72 = 24843.60. Add the
500fee: total cost25344. Interest is4844.
Loan B wins on the monthly payment by 60.48 a month, and on the rate by 0.6 points. It loses on total cost by 25344 - 24332 = 1012 dollars. The extra year of interest plus the fee more than cancel the lower rate. The cheaper loan is A.
Reading the results
Four numbers per offer decide the verdict.
- Monthly payment
- What leaves your account each month. Lower is easier on cash flow, but says nothing about total cost.
- Total interest
- The price of borrowing, excluding fees. Grows with both the rate and the term.
- Total cost
- Every payment plus fees. This is the number that decides which loan is cheaper.
- Effective APR
- The rate that includes fees. Use it to compare offers when the amounts or fees differ.
| Offer | Rate | Term | Monthly | Total cost | Interest |
|---|---|---|---|---|---|
| Loan A | 8% | 5 yr | 405.5 | 24332 | 4332 |
| Loan B | 7.4% | 6 yr | 345.1 | 25344 | 4844 |
If Loan B's lower payment matters for your budget, ask the lender for the 7.4% rate over 5 years. At 5 years Loan B's payment would be about 401 and its total cost about 24560 including the fee, still slightly more than A because of the fee, but the gap shrinks from 1012 to about 228. The term, not the rate, drove most of the difference.
How term length reshapes the cost
The single most instructive move is stretching the term at a fixed rate. Payment falls, total interest rises. The widget lets you watch both at once.
Common mistakes
Judging by the monthly payment. The demo shows the trap directly: the cheaper monthly payment cost 1012 more overall. Always compare total cost.
Ignoring the fee. A 500 origination fee on a 20000 loan is 2.5% of the amount. Fold it into the effective APR and a headline 7.4% becomes noticeably higher.
Comparing different amounts. If one offer is for 20000 and the other for 21000, you are comparing debts, not prices. Match the amounts first.
Forgetting your own plans. These totals assume you pay every scheduled payment. If you expect to pay the loan off early, the longer, lower-rate loan can win, because you skip its later interest. Check that with the Extra Loan Payment Calculator or the Remaining Loan Balance Calculator.
Related tools
To see one loan in full, including its schedule, use the Loan Calculator. If you are weighing whether to replace an existing loan, the Refinance Break-Even Calculator tells you how many months of savings cover the switching cost. To roll several debts into one, the Debt Consolidation Calculator compares your current debts against a single new loan.
For paying off what you already owe, compare strategies with the Debt Snowball vs Avalanche tool, and check whether a new loan fits your budget with the Debt-to-Income Ratio Calculator.
Frequently asked questions
Why does the lower rate loan cost more?
Because it runs a year longer and carries a fee. In the demo, Loan B's rate saves interest per year, but 12 extra months of interest plus the 500 fee add up to more than that saving. Rate is only one of three levers; term and fees are the others.
Should I always pick the loan with the lowest total cost?
Not always. Total cost assumes you keep the loan to the end and value every dollar equally across time. If a lower monthly payment keeps you out of trouble each month, that has real value the total-cost number does not capture. Know the size of the trade: in the demo it is 1012 over six years, about 14 a month.
Is the effective APR the same as the quoted rate?
Only when there are no fees. With no fee, Loan A's effective APR equals its 8% quote. With the 500 fee deducted up front, Loan B's effective APR rises above 7.4%, because you repay as if you borrowed 20000 but received only 19500.
What if I plan to pay the loan off early?
Then the later payments never happen, and the total-cost comparison shifts toward the lower-rate loan. Model your real payoff date with an extra-payment or remaining-balance tool before deciding.
These are educational estimates, not financial advice. Loan terms, fees, and the exact APR definition vary by lender and country. Confirm the numbers on your actual offer documents, and talk to a qualified adviser before you commit.
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