Total Loan Cost
What the repayments add up to, and how much of it is interest.
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Formula
How the calculation works
A loan's total cost is the payment multiplied by the number of payments, and the interest is whatever that total exceeds the principal. On 15,000 at 9% over five years the payment is 311.38, so the total is 18,683 and the interest is 3,683, roughly a quarter of the amount borrowed.
The payment comes from a formula that is easy to misread: the principal times the monthly rate, divided by one minus the compounded discount over the term. The important property is that the payment is constant, which means its composition is not. Early payments are mostly interest, later ones mostly principal.
This is why the monthly payment and the total cost are different questions. A longer term lowers the first and raises the second, because the same principal is spread over more months and interest accrues in each of them. Choosing a term is choosing between those two, not optimising one of them.
Common mistakes
- Comparing loans by the monthly payment alone, when a lower payment often means a longer, dearer loan.
- Assuming the interest is the rate times the principal. 9% of 15,000 is 1,350, but the interest paid is 3,683, because the balance is charged every month.
- Forgetting fees and insurance, which sit outside the interest but are part of the real cost.
When to use it
- Use it to compare two offers properly and to see how much of the total is interest rather than principal.
- It covers the interest only. Fees, insurance and any early-repayment charge sit outside it and can change the ranking of two offers.
Worked example
15,000 at 9% over five years pays 311.38 a month, 18,683 in total, of which 3,683 is interest.
Common questions
Why does a longer term lower the payment but not the cost?
A longer term spreads the same principal over more months, and interest accrues every month. The payment falls while the total rises.
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