How do I work out what a loan actually costs?

Borrowing is advertised as a monthly figure because a monthly figure is easy to say yes to. The number that matters takes one line of arithmetic.

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Step by step

1. Do the total repayable sum.Monthly payment multiplied by the number of months, plus any fees, minus the amount borrowed. That difference is what the loan costs you, and it is often startling.
2. Understand what APR is.The annual percentage rate includes the interest and the compulsory fees, expressed as a yearly rate. It exists so different products can be compared on one number.
3. Watch for representative APR.A lender only has to offer the advertised rate to 51% of accepted applicants. The rate you are actually offered can be considerably higher, and it only appears after you apply.
4. Compare the same term or the comparison is meaningless.A longer term always gives a lower monthly payment and almost always a higher total cost. Comparing a three-year loan with a five-year one on the monthly figure tells you nothing.
5. See what an extra year really costs.Run the total repayable sum at each available term. The gap between three and five years on the same loan is usually the clearest argument for the shorter term you can afford.
6. Read the fees.Arrangement fees, early settlement charges, late payment fees. Early repayment charges matter particularly if there is any chance you will clear it sooner.
7. Treat 0% offers carefully.Genuinely free while the promotional period lasts. Check what the rate becomes afterwards, whether the balance must be cleared by a fixed date, and whether missing a payment cancels the offer.
8. Understand credit card minimum payments.Paying the minimum on a card balance can take decades and cost more than the original spending. The statement shows this figure by law — read it.
9. Distinguish secured from unsecured.A secured loan is tied to your home and the rate is lower for exactly that reason. The consequence of not paying is fundamentally different, and it is not a small distinction.
10. Use a soft-search eligibility check.Most lenders and comparison sites offer one. It shows likely acceptance without leaving a hard footprint on your credit file, which repeated applications do.
11. Check the buy-now-pay-later terms.Interest-free instalments still carry late fees and, increasingly, appear on credit files. Several running at once is easy to lose track of.
12. Compare against what you already owe.Borrowing at 8% while carrying a card balance at 24% is a poor trade. Clearing the most expensive debt first is nearly always the better use of the money.
13. Ask whether waiting is an option.For anything that is not urgent, saving the amount over the same period costs nothing and often takes barely longer than the loan term.

Tips

• Total repayable, not the monthly payment. One multiplication tells you what the advert will not.
• A longer term is a lower payment and a higher cost. Always compare like for like.
• Use soft-search eligibility checks. Multiple hard applications damage your credit file.

Common mistakes

• Comparing loans on the monthly payment — A longer term always lowers the monthly figure while raising the total cost, so the cheapest-looking option is frequently the most expensive.
• Assuming you will get the advertised APR — Only 51% of accepted applicants have to be offered it. The rate you are given can be substantially higher.

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