What a loan really costs
A loan advertisement shows a monthly payment, and a low monthly payment can hide a high total cost. The one that counts is the total: what you give back, minus what you received.
Everything is worked out in your browser. No amount leaves your device, nothing is saved, and the Clear button empties everything. How to check it.
Enter an amount, a rate and a term: the result appears here.
One of the boxes does not hold a readable number, and it is flagged. Spaces, commas and full stops are accepted.
One of the boxes holds a perfectly readable number that describes no real situation, and it is flagged. For instance a negative amount, rate, insurance premium or fee, or a term shorter than one month.
| Monthly repayment | |
|---|---|
| Monthly payment all in, insurance included | |
| The last monthly payment, which adjusts the cents | |
| Total paid by the end | |
| Cost of the loan | |
| Cost as a share of the amount borrowed | % |
| For every 100 borrowed, you give back |
Redo the calculation with a longer term, changing nothing else. The monthly payment falls, the cost rises. That is exactly what a “from as little as” offer is selling.
Two rates, and one does not stand in for the other. The borrowing rate, or nominal rate, is the price of the money lent: it is what builds the monthly payment, and it is what the box expects. The all-in rate already carries the insurance and the compulsory fees inside its percentage: writing it here would count them twice, since they have their own boxes. It is for something else, and something valuable: putting two offers side by side. This tool does not work it out; it gives the total paid, which compares two offers of the same amount over the same term.
The method
An amortising loan is repaid in equal monthly payments. The formula is the one every bank uses:
monthly payment = amount × monthly rate, divided by 1 minus (1 + monthly rate) raised to the power of minus the number of months.
- The monthly rate is that annual borrowing rate divided by twelve, the convention lenders use. A borrowing rate of 6% gives 0.5% a month. An all-in rate is not divided that way, and does not belong in that box.
- The monthly payment is rounded to the cent, the way a lender collects it, and the last monthly payment carries the cents that this rounding set aside month after month: it is the exact total minus every earlier payment, which is why it is shown as soon as it differs. The total paid is therefore the monthly payment multiplied by the number of months minus one, plus that last monthly payment, plus the monthly insurance multiplied by the number of months, plus the charges at the start.
- The cost of the loan is that total minus the amount borrowed.
- If the rate is zero, the formula reduces to amount divided by number of months: that is the only case where payment in instalments costs nothing, and you then have to check that no charge is standing in for the rate.
The three places where the cost hides
- The term. Stretching a loan makes the monthly payment bearable and the total heavier. Two offers at the same rate are not the same price if one runs twice as long.
- The insurance. It is added every month and repays none of your debt. Its weight can be measured without us: multiply the monthly premium by the number of months, and you see what it weighs inside the cost of the loan shown above.
- The charges at the start. When they are added to the amount borrowed instead of being paid up front, they earn interest in their turn for the whole term.
According to the OECD international survey of adult financial literacy, recorded in 2022-2023 across 39 countries and economies, 26% of adults compare offers from several providers before signing up. The calculation above is what makes that comparison possible in one minute.
What this tool does not do
- It recommends no loan, no lender, no product, and it names none.
- It does not replace the amortisation schedule of a real offer: it is a tool for understanding, not a contractual quotation.
- It ignores late payment penalties, deferred instalments and early repayment, whose rules depend on the country: see Your country.
Read next: all-in rate, amortisation, total cost. Before signing anything, the Before you sign page gives the reading order for a contract.