The short answer
- Compare total cost (all interest plus all fees) over the time you expect to keep the loan.
- On $20,000, a 5-year loan at 8% with an $800 fee costs $5,132; at 10% with no fee, $5,496.
- But the fee only pays off if you keep the 8% loan at least 29 months.
- A 4-year loan at 9% with a $400 fee costs least of all, $4,290, though its payment is the highest.
Four ways to measure a loan
| Measure | What it tells you | Watch out for |
|---|---|---|
| Monthly payment | Whether it fits your budget | Longer terms lower it but cost more |
| Total cost | Interest plus fees in dollars | Assumes you keep the loan to the end |
| APR | Yearly cost including fees | Only fair between loans of the same term |
| Break-even | How long a fee takes to pay off | Only matters when fees differ |
Three offers compared
Three lenders offer the $20,000 you need:
| Offer A | Offer B | Offer C | |
|---|---|---|---|
| Rate | 8% | 10% | 9% |
| Term | 60 months | 60 months | 48 months |
| Fees | $800 | $0 | $400 |
| Monthly payment | $405.53 | $424.94 | $497.70 |
| Total interest | $4,332 | $5,496 | $3,890 |
| APR with fees | 9.74% | 10.00% | 10.06% |
| Total cost | $5,132 | $5,496 | $4,290 |
Offer C has the highest APR and the highest payment, yet it is the cheapest in dollars because you pay interest for one year less. Offer A has the lowest APR and the lowest payment, and costs $365 less than Offer B over five years.
Total cost: the bottom line
Total cost is the clearest single number when you will keep the loan to the end, because it is in dollars and includes everything. It is not the whole story when payments differ: a shorter loan takes more of your budget each month, which may push other costs onto a credit card.
What APR tells you, and what it hides
The APR turns fees into a yearly rate, so it is the fairest single figure for loans with the same term. Between different terms it can point the wrong way, as Offer C shows. It also assumes you make every payment to the end; if you repay early, a loan with high fees costs more than its APR suggests. Our APR calculator shows how the APR is worked out and what it becomes if you pay off early.
The break-even month
When one offer charges a fee to get a lower rate, it starts behind: you pay the fee on day one. Each month after that, its lower rate means less interest, so it gradually catches up. The break-even month is when the interest saved has paid back the extra fee.
- Cost after 6 monthsfees + interest so farA $1,573, B $967
- Cost after 12 monthsA $2,278, B $1,854
- Cost after 24 monthsA $3,474, B $3,368
- Cost after 36 monthsA $4,365, B $4,507
Offer C against Offer B breaks even at month 20. Offer A never catches Offer C: C’s shorter term means it is always cheaper so far, at every point while both loans run.
How the break-even is worked out
Some calculators divide the fee by the monthly payment saving. That is quick but ignores the fact that a lower rate also pays the balance down faster. This calculator instead tracks the real cost so far, fees plus every month’s interest, for each offer, and finds the first month the dearer-upfront offer has cost no more than the other. That is exactly what you would have paid if you repaid the loan in full at that point.
If you might repay early
People pay off loans early more often than they expect: a bonus, a sale, a refinance. If there is a real chance you will repay before the break-even month, the no-fee offer is safer. The chart and table under "If you pay off early" show each offer’s cost at every point, so you can read off the answer for your own plans. Check too that neither loan has a prepayment penalty.
Same rate, different terms
- Payment
- $617.54
- Total interest
- $2,232
- Payment
- $396.02
- Total interest
- $3,761
On $20,000, two extra years cut the payment by $221.52 but add $1,530 of interest. In real offers the longer term usually comes with a higher rate too, which widens the gap.
The payment trap
Sellers of cars, furniture and home improvements often ask "what payment are you comfortable with?" and then stretch the term to hit it. The payment fits, but the total cost balloons. Decide on the amount and the shortest term you can afford first, then compare offers on total cost. Our auto loan calculator adds sales tax and a trade-in for car deals.
Watch for add-ons
Credit insurance, service contracts and GAP coverage are sometimes added into the loan amount. They raise the payment and you pay interest on them. Ask for each to be shown separately and decide on it alone.
Fees paid upfront or added on
Many lenders let you add the fee to the loan instead of paying it in cash. You then pay interest on the fee for the whole term. Offer A with its $800 fee added to the loan has a payment of $421.75 and a total cost of $5,305, against $5,132 with the fee paid upfront, and it takes until month 37 to beat Offer B. Turn on "add the fees to the loan" under More options to compare.
Comparing mortgage offers
Mortgage lenders often give a choice of rates with different points. On a $300,000, 30-year loan, compare 6.5% with no points against 6% with 2 points ($6,000):
| 6.5%, no points | 6%, 2 points | |
|---|---|---|
| Monthly payment | $1,896.20 | $1,798.65 |
| APR | 6.50% | 6.19% |
| Interest and fees over 30 years | $382,633 | $353,515 |
| Points pay off after | – | 48 months |
Over the full term the points save about $29,000, but only if you keep the loan more than four years. Compare the Loan Estimates’ page 3 "In 5 Years" figures as well, and see our mortgage points calculator and refinance calculator.
Terms that do not show in the numbers
- Prepayment penalties: rare on personal and car loans, but check.
- Fixed or variable rate: a variable rate can rise after you sign.
- Late fees and grace days before a payment counts as late.
- Hardship options: some lenders let you defer payments if you lose your job.
- Autopay discounts, often a quarter of a percentage point. Enter the discounted rate if you will use autopay.
- Speed and service: how quickly the money arrives and how easy the lender is to deal with.
Shopping without hurting your credit
Many lenders show a rate after a soft credit check, which does not affect your score. When you formally apply, a hard inquiry is recorded. Credit scoring models count several inquiries for the same kind of loan (a mortgage, a car loan) within a short window as one, so do your rate shopping within a couple of weeks. Check your free credit reports at AnnualCreditReport.com before you start, and dispute any errors.
Using the lenders' disclosures
For consumer loans, the Truth in Lending disclosure shows the APR, the finance charge, the amount financed and the total of payments, worked out the same way by every lender. For most mortgages, the three-page Loan Estimate uses a standard layout so you can line up pages side by side. Enter the rate, term and fees from each into the calculator to check the figures and see the break-even, which the forms do not show.
Comparing a new loan with your current debt
You can also use the calculator to compare taking a new loan with keeping what you have. Enter your current balance as the amount, your current rate and remaining months as one offer with no fees, and the new loan as the other. If the new loan’s break-even is longer than you will keep it, staying put is cheaper. For several card balances, our debt consolidation calculator is built for the job.
A comparison checklist
- Get at least three quotes for the same amount, ideally on the same day.
- Write down each rate, term and every fee.
- Compare total cost over the time you really expect to keep the loan.
- If fees differ, check the break-even month.
- Make sure the payment leaves room in your budget.
- Read the small print on prepayment, late fees and rate changes.
Using the calculator
Enter the amount you need, then each offer’s rate, term in months and upfront fees. Under More options, add a third offer and choose whether each offer’s fees are added to the loan. The results name the cheapest offer, set every figure side by side, chart each offer’s cost if you repay early, and give the break-even month for every pair where one has higher fees.
Key numbers
| Item | Figure |
|---|---|
| $20,000 at 8%, 60 months, $800 fee | $405.53 a month, $5,132 total cost |
| $20,000 at 10%, 60 months, no fee | $424.94 a month, $5,496 total cost |
| $20,000 at 9%, 48 months, $400 fee | $497.70 a month, $4,290 total cost |
| Break-even, 8% + $800 vs 10% | 29 months |
| $300,000 mortgage, 6% + 2 points vs 6.5% | breaks even at 48 months |