How to read the total cost of a loan

The rate is not the cost

An interest rate tells you how quickly a balance grows. It does not tell you what you will hand over in total. Two loans at the same rate can cost noticeably different amounts once the term and any fees are included.

Three numbers to write down

• The monthly payment. What leaves your account, and when.
• The total repayable. Monthly payment multiplied by the number of payments, plus any fees charged up front.
• The cost of credit. Total repayable minus the amount you borrowed. This is the real price.

Where the surprises usually hide

Arrangement fees charged at the start, and late payment charges triggered by a missed date, are the two that catch people out most often. Neither appears in the headline rate. Both should be stated before you sign, and if they are not, ask.

Comparing fairly

Compare loans over the same term. A five-year loan will almost always show a lower monthly payment than a three-year one at the same rate, and a higher total cost. Judging them side by side on the monthly figure alone rewards the more expensive option.

Before you commit

Run the numbers through the repayment calculator and check that the total repayable is a figure you are comfortable with. If it is not, borrowing less or shortening the term will move it more than shopping for a slightly better rate.