Calculating a Loan’s Total Cost
This calculator can be used by borrowers to estimate the processing fees and potentially hidden charges associated with a loan. The calculator needs a total of four inputs, including:
- The total amount of the loan, which is the amount of money borrowed
- The Annual Percentage Rate, or APR, quoted for the loan
- The interest rate charged on the loan, which is also known as the finance charge
- The term of the loan, which is the duration of the loan, stated in years
The calculator then provides the user with two outputs, including:
- An estimate of the monthly payments for the loan
- The total cost, or fees associated with the loan
Annual Percentage Rate versus Interest Rate
While the terms are often used interchangeably, there is a difference between the interest rate charged on a loan and its annual percentage rate, or APR. The interest rate on a loan are the finance charges. The interest rate is used to calculate the payments the borrower must make each month to repay the loan. In the United States, lenders are also required to inform borrowers of the loan’s APR. This value not only includes the interest rate charged on the loan, but also includes all the costs associated with the loan such as origination and processing fees. Since an APR calculation considers the total cost to borrow, it can be used by borrowers to make a fair and direct comparison of loans from various lenders. When comparing two loans, the loan with the lower APR is the best deal for the borrower.
Here are two loans proving this point:
- Loan Amount = 10,000
- APR = 4.125%
- Interest Rate = 4.000%
- Loan Term = 4 years
The monthly payment on this loan is 226 and the fees are 25
- Loan Amount = 10,000
- APR = 4.250%
- Interest Rate = 3.875%
- Loan Term 4 years
The monthly payment on this loan is 225 and the fees are 74
At first it might seem like Loan B is the better deal. It has a lower interest rate and monthly payment. However, looking at the APRs for each loan we see that Loan A is the better deal and when we look at the fees, we also see Loan B’s fees are nearly 50 higher than Loan A’s fees.
While the laws in the United States are structured to protect borrowers, the fees associated with a loan may be “hidden” in the lender’s terms and conditions or they may not be immediately clear to the borrower. That is how our loan fees calculator can help borrowers make better informed decisions by figuring out exactly how much each lender is charging in terms of fees.