How to Understand Your Personal Loan Costs

A personal loan can be a powerful financial tool, offering a lump sum of cash with a fixed interest rate and a predictable repayment schedule. Before you sign on the dotted line, it's crucial to understand exactly what you'll be paying. Our calculator is designed to demystify the numbers, showing you not just the monthly payment but the total cost of the loan over its lifetime.

What is the Difference Between Interest Rate and APR?

This is one of the most important concepts when comparing loan offers. While they seem similar, they represent different things:

• The Interest Rate is the base cost of borrowing the money, expressed as a percentage.
• The Annual Percentage Rate (APR) is the true cost of the loan. It includes the interest rate PLUS any additional lender fees, such as an origination fee. Because it includes fees, the APR is almost always higher than the interest rate and is the best number to use when comparing loan offers from different lenders.

Our calculator computes the estimated APR for you, providing a more accurate picture of the loan's cost.

Key Factors That Affect Your Loan

• Loan Amount: How much you need to borrow. Borrowing more will result in a higher monthly payment, all else being equal.
• Loan Term: The length of time you have to repay the loan. A longer term will result in lower monthly payments, but you will pay significantly more in total interest over the life of the loan. A shorter term has higher payments but saves you money on interest.
• Credit Score: Your credit score is the single most important factor in determining the interest rate you'll be offered. A higher credit score signals to lenders that you are a low-risk borrower, and they will reward you with lower interest rates.
• Origination Fee: A one-time administrative fee that some lenders charge, usually 1% to 8% of the loan amount. This fee is a key component of the APR.

Using the Amortization Schedule

The month-by-month payment schedule generated by the calculator is called an amortization schedule. It shows you exactly how each payment is broken down into principal (the amount you borrowed) and interest (the cost of borrowing). In the early years, a larger portion of your payment goes to interest. As you pay down the balance, more of each payment goes towards the principal, helping you build equity faster. This table is a fantastic tool for visualizing your progress toward becoming debt-free.