What to Compare When Evaluating Loan Offers
Monthly payment is only one dimension of a loan comparison. The most important figures are: APR (which reflects the true cost of the loan including fees), total interest paid over the full term, and total amount repaid. A loan with a lower monthly payment but a longer term can cost significantly more in total interest.
APR vs. Interest Rate
The interest rate is the cost of borrowing the principal. APR (Annual Percentage Rate) includes the interest rate plus lender fees, points, and other costs, expressed as a single annual percentage. When comparing loan offers from different lenders, always compare APRs rather than stated interest rates.
How Loan Term Affects Total Cost
On a $50,000 personal loan at 9%, a 3-year term produces a monthly payment of $1,590 and total interest of $7,240. A 5-year term reduces the payment to $1,038 but increases total interest to $12,280. The right term depends on your cash flow needs and total interest tolerance.
Prepayment Terms
If you may pay off the loan early, check for prepayment penalties. A loan with a lower rate but a prepayment penalty may cost more than a slightly higher-rate loan without one if you refinance or pay off early.
A Side-by-Side Example
Offer A: 6.75% with $2,000 in fees. Offer B: 6.5% with $6,000 in fees, on a $300,000 loan. Offer A's payment is about $1,946/mo; Offer B's is about $1,896/mo -- a $50/mo advantage for Offer B. But Offer B's extra $4,000 in upfront fees takes 80 months (6.7 years) to recoup through the lower payment. If you will not keep the loan that long, Offer A is the better deal despite the higher rate.
Common Loan Comparison Mistakes
Comparing offers with different terms as if they were equivalent. A 6% rate on a 40-year term is not directly comparable to 6.5% on a 30-year term -- normalize by term length before comparing.
Ignoring how long you'll actually keep the loan. As shown above, the "better" offer on paper can be the worse choice if you will sell or refinance before the fee difference is recouped.
Frequently Asked Questions
Should I always choose the lowest APR? Usually, but not always -- if you plan to keep the loan for only a short time, a lower-fee, slightly-higher-rate offer can sometimes cost less than a low-APR offer loaded with upfront points.
Do all lenders calculate APR the same way? APR calculation follows federal Truth in Lending rules, but which fees each lender includes can vary slightly -- use the Loan Estimate's Section A alongside APR for the fullest picture.
The Inputs, Field by Field
Loan amount. The principal for each offer you are comparing. Keep this identical across offers so the comparison isolates the rate, fees, and term rather than the size of the loan.
Interest rate and fees. Enter each offer's rate along with its points and lender fees. Fees are what separate the APR from the stated rate, and they are where a "lower rate" offer often loses its edge.
Term. The length of each loan. Comparing a longer term against a shorter one on monthly payment alone is misleading -- normalize by term, then compare total cost.
How to Read Your Results
Line the offers up on three figures: APR, total interest, and total amount repaid. APR folds fees into a single annual rate and is the fairest single-number comparison, but pair it with how long you actually expect to keep the loan. As the side-by-side example above shows, a lower-rate offer loaded with upfront fees can cost more than a higher-rate, low-fee offer if you sell or refinance before the fees are recouped.
Assumptions and Limitations
This calculator assumes fixed rates and equal monthly payments and compares the offers exactly as you enter them. It cannot see fees you omit, so transcribe each Loan Estimate carefully. It does not model variable-rate resets or prepayment penalties unless you account for them separately. Results are educational estimates to guide questions for your lenders, not a recommendation of any specific offer.
More Frequently Asked Questions
Should I always choose the lowest APR? Usually, but not always. If you expect to keep the loan only briefly, a lower-fee offer with a slightly higher rate can cost less than a low-APR offer loaded with upfront points, because you never stay long enough to recoup the points.
What is the single best number for comparing loans? APR is the best single figure because it folds fees into one annual rate, but pair it with total interest over the term and how long you actually plan to hold the loan for a complete picture.
Related Calculators and Guides
Learn what to scrutinize on each quote in how to compare loan offers and how to read a loan estimate. Then size the specific loan with the personal loan calculator or the auto loan calculator, depending on what you are borrowing for.