How loan comparison works (formulas, examples, FAQs)

A loan comparison is one of those “small effort, big money” steps. Two offers can look identical at a glance (“same rate, same term”), but tiny differences like fees, term length, or a rate that’s only 0.25% higher can move the total cost by hundreds or even thousands of dollars over time. This Loan Comparison Calculator lets you enter two loan options side-by-side and instantly see which one is cheaper, how the monthly payment differs, and where the savings come from.

• Monthly payment: What you pay each month if you follow the schedule.
• Total interest: How much interest you pay over the full term.
• Total cost: Total paid over the term including upfront fees you enter.
• Effective rate (approx.): A “fees-adjusted” rate estimate to compare offers with different fee levels.

Most standard loans (personal loans, auto loans, many mortgages) use amortization: each payment contains both interest and principal. If your loan has principal P, annual interest rate APR, and term in months n, the monthly interest rate is:

r = APR / 12 (using decimal form; for example 6% APR → 0.06/12)

The monthly payment (excluding fees) is the classic amortization formula:

Payment = P × r / (1 − (1 + r)⁻ⁿ)

If APR is 0%, the formula simplifies to Payment = P / n.

Once you have the monthly payment, total paid (not counting fees) is Payment × n. Total interest is that total paid minus the principal:

Total Interest = (Payment × n) − P

Many lenders also charge fees (origination, processing, “points”, documentation). Fees matter because they’re real money leaving your pocket. This tool treats fees as an upfront cost and reports:

Total Cost = (Payment × n) + Fees

If your lender rolls fees into the loan balance (financed fees), you can model that by adding the fees into the loan amount and setting “Fees” to 0. But for most comparisons, entering fees separately makes the tradeoff easy to see.

APR is supposed to reflect fees, but offers aren’t always presented consistently. So this calculator also estimates an “effective APR”: the rate that makes the present value of payments equal the amount you effectively receive (P − Fees).

We solve for a monthly rate r* such that:

P − Fees = Σ Payment / (1 + r*)^t for t = 1…n

This is computed numerically (a quick Newton-style solve). It’s designed for comparison, not legal disclosure.

Two personal loan offers for $20,000 over 5 years:

• Loan A: 8.50% APR, $300 fees
• Loan B: 8.00% APR, $900 fees

Loan B has a lower rate, but higher fees. Depending on how big the fee gap is relative to the interest savings, either loan could win. Plug the numbers in to see exact monthly payments, total interest, and total cost — then choose with clarity.

• Compare true cost, not just the rate. Fees + term length can overpower small rate differences.
• Match the term to your goal. Shorter term = higher payment but lower total interest.
• Decide what you’re optimizing. Lowest payment vs lowest total cost vs faster payoff.
• Run “what if” scenarios. Try a slightly higher rate, or a shorter term, to see sensitivity.

• Ignoring fees. A “low rate” with high fees can be more expensive.
• Comparing different terms incorrectly. A 3-year and 7-year loan can’t be judged by APR alone.
• Not checking affordability. The cheapest loan is useless if the payment breaks your budget.
• Forgetting prepayment rules. If you plan to pay early, penalties can change the winner.

• Which matters more: rate or fees?

  Over the full term, the best choice is usually the one with the lowest total cost. If you might refinance or repay early, fees often matter more because you won’t benefit from the lower rate long enough to “earn back” the extra upfront cost.

• What’s the difference between APR and interest rate?

  The interest rate is the nominal rate applied to the balance. APR is intended to represent the yearly borrowing cost including certain fees. Disclosures vary, so always confirm what’s included.

• Does this handle variable-rate loans?

  This tool compares fixed-rate amortized loans. For variable rates, run multiple scenarios (best / expected / worst) by changing the APR input.

• Why do longer terms often cost more overall?

  Longer terms lower the monthly payment by spreading principal over more months — but you pay interest longer, which usually increases total interest.

• Is the effective APR the same as APR?

  Not exactly. It’s a fees-adjusted estimate derived from the payment stream and net proceeds. Use it to compare offers quickly.

Educational tool only. Always confirm figures with your lender’s official loan estimate and terms.