How to Compare Loan Options Like a Pro
When comparing loans, don't just look at the monthly payment. A lower monthly payment might mean you're paying for a longer term, which can cost you thousands more in interest.
Key Metrics for Comparison
When using the calculator above, look at these three metrics:
- Monthly Payment: Can you afford this every month? This is about cash flow.
- Total Interest Paid: How much are you paying the lender for the privilege of borrowing? This is about long-term cost.
- APR: Does the interest rate reflect the true cost including fees? Use our APR calculator if you're not sure.
The Trade-Off: Rate vs. Term
In the example above, Option B has a higher monthly payment ($743 vs $489) but a lower total cost ($26,778 vs $29,349). This is because the term is shorter (3 years vs 5 years).
- Shorter Term: Higher monthly payment, lower total interest.
- Longer Term: Lower monthly payment, higher total interest.
- Lower Rate: Lower monthly payment AND lower total interest (all else being equal).
Check for Prepayment Penalties
Some loans charge a fee if you pay them off early. If you plan to make extra payments, ensure your loan is "open" and has no prepayment penalties. This allows you to use the debt payoff strategy effectively.