Loan cost comparison: total cost and effective rate
Compare up to three loan offers side by side. Fees, payout and monthly charges are included, so you see total cost and an effective rate, not just the headline interest rate.
Two loans with the same headline rate can cost very different amounts. An upfront fee taken from the payout, a fee added to the loan or a monthly account charge all raise what you really pay for the money you receive.
Your assumptions
Costs USD 1,564 in total, an effective annual rate of 10.34%. The most expensive offer costs USD 431 more.
| Measure | Offer A | Offer B | Offer C |
|---|---|---|---|
| Money you receive | USD 10,000 | USD 9,800 | USD 9,700 |
| Monthly payment | USD 322.20 | USD 315.68 | USD 243.66 |
| Upfront fee | USD 0 | USD 200 | USD 300 |
| Total repaid | USD 11,599 | USD 11,364 | USD 11,696 |
| Total cost of borrowing | USD 1,599 | USD 1,564 | USD 1,996 |
| APR, nominal (IRR × 12) | 9.90% | 9.88% | 9.49% |
| Effective annual rate | 10.36% | 10.34% | 9.92% |
| Cost vs cheapest | +USD 35 | USD 0 | +USD 431 |
The offers pay out different amounts. Total cost is measured against the money you actually receive. The effective rate is the fairer comparison when payouts or terms differ.
How the calculation works
Payment = P × r / (1 − (1 + r)^−n) + monthly fee; solve Payout = Σ Payment / (1 + i)^t for i; APR = 12 × i; effective rate = (1 + i)^12 − 1P is the amount borrowed (the requested amount plus any fee added to the loan), r the nominal rate divided by 12 and n the term in months. The payout is the money you actually receive. The monthly rate i is the internal rate of return (IRR) that makes the payout equal to the present value of all payments, fees included.
Step by step
- Fee deducted: you borrow the full amount, but receive the amount minus the fee. Fee added: you receive the full amount, but borrow the amount plus the fee.
- Monthly payment = standard installment formula on the amount borrowed, plus any monthly account fee.
- Total repaid = monthly payment × number of months. Total cost of borrowing = total repaid − money you receive.
- The effective monthly rate i is found numerically (bisection) from the payout and the payments. Nominal APR multiplies it by 12, as US-style APR does; the effective annual rate compounds it, as the EU annual percentage rate of charge (APRC) does.
- Cost vs cheapest compares each offer’s total cost with the lowest one. When payouts differ, the effective rate is the fairer comparison.
Limitations
Monthly payments at month-end with equal months; real contracts can use daily interest, different first payment dates, insurance or other charges, and legal APR rules that differ by country. Default values are invented examples, not market rates. Illustration, not advice or an offer.
Questions, answered.
Why is the effective rate higher than the interest rate?
Fees raise the cost without raising the payout. The effective rate spreads all costs over the money you actually receive and the time you have it.
Why do the nominal APR and the effective rate differ?
Both use the same monthly rate. Nominal APR multiplies it by 12; the effective rate lets it compound for 12 months. Countries publish one or the other, so compare like with like.
Can I compare loans with different terms?
Yes, but a longer term usually has a lower payment and a higher total cost. Look at total cost and the effective rate together.
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