Calculate and compare two loans by monthly payment, total interest, and total cost to find which loan is cheaper over its full term.
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Loan Comparison Formula
To compare two loans, calculate the monthly payment, total interest, and total cost for each loan using the standard amortized loan payment formula, then compare the totals.
M = P \times \dfrac{r(1+r)^n}{(1+r)^n - 1}
Where:
M is the monthly payment.
P is the loan principal, which is the amount you borrow.
r is the monthly interest rate, equal to the annual interest rate divided by 12 and written as a decimal.
n is the total number of monthly payments, equal to the loan term in years multiplied by 12.
After you find the monthly payment for a loan, calculate its total cost and total interest with the formulas below.
Total\ Cost = M \times n
Total\ Interest = (M \times n) - P
The loan with the lower total cost is the cheaper option over its full term, even when it carries a higher monthly payment.
Sample Monthly Payments by Interest Rate
The values below show the monthly payment, total interest, and total cost for a $20,000 loan repaid over 5 years (60 months) at several interest rates. Use them as a quick reference for how rate changes affect the cost of a loan.
| Annual Rate | Monthly Payment | Total Interest | Total Cost |
|---|---|---|---|
| 4% | $368.33 | $2,099.83 | $22,099.83 |
| 5% | $377.42 | $2,645.48 | $22,645.48 |
| 6% | $386.66 | $3,199.36 | $23,199.36 |
| 7% | $396.02 | $3,761.44 | $23,761.44 |
| 8% | $405.53 | $4,331.67 | $24,331.67 |
Loan Comparison Example
You are deciding between two offers for a $25,000 loan. Loan A has a 6.5% annual rate over 5 years. Loan B has a lower 5.5% annual rate but a longer 6 year term.
Loan A: the monthly payment is $489.15, the total interest is $4,349.22, and the total cost is $29,349.22.
Loan B: the monthly payment is $408.45, the total interest is $4,408.20, and the total cost is $29,408.20.
Loan B has the smaller monthly payment, but because of its longer term it costs $58.97 more in total. In this case Loan A is the cheaper loan over its full life, which shows why the monthly payment alone does not tell you which loan is better.
FAQ
What is a loan comparison calculator?
It is a tool that calculates the monthly payment, total interest, and total cost for two loans at once so you can see which loan is cheaper. You enter the amount, annual interest rate, and term for each loan, and the calculator does the rest.
Should I just choose the loan with the lowest monthly payment?
Not always. A lower monthly payment often comes from a longer term, which means you pay interest for more months and usually pay more in total. Compare the total cost, not only the monthly payment, before you decide.
Does a lower interest rate always mean a cheaper loan?
No. A lower rate reduces cost only when the loan term is the same. A loan with a lower rate but a longer term can still cost more in total interest, so you should compare both loans over their full repayment periods.