Loan Comparison Calculator

One amount, two ways of paying it back

Notice what this calculator does not ask for. There is one loan amount at the top, not two.

That is a deliberate constraint and a useful one. You are borrowing a fixed sum, and the question is which of two offers to take. Same money, two different terms and rates, and you want to know which one leaves you better off.

Fixing the amount removes the most common way a comparison goes wrong. If one side of a table shows a bigger loan than the other, the totals will differ for reasons that have nothing to do with the offers, and the difference looks like a saving when it is really just a smaller debt.

Here, both columns are the same debt. Whatever separates them is genuinely the deal.

Five boxes

1. Loan Amount. What you are borrowing, once, at the top. It applies to both options.
2. Loan Term 1 in years, and the interest rate for that offer.
3. Loan Term 2 in years, and the interest rate for that one.

Press Calculate and each option comes back with four figures: monthly payment, annual payment, total payment and total interest.

Both sides use monthly repayment, so the comparison is like for like. If one of your offers repays on a different schedule, the loan payment calculator handles quarterly and annual instalments and you can bring the results back here.

What the four rows are each for

Four numbers per option sounds like more than you need. Each one answers a different question, and people tend to use only the first.

Monthly Payment. Whether you can carry it. This is the affordability number and the one that decides whether a loan is possible at all.

Annual Payment. What the loan costs you in a year. Useful for anyone budgeting annually rather than monthly, which includes most small businesses and anyone whose income is seasonal.

Total Payment. Everything you will hand over across the whole term, principal and interest together. The full price of the arrangement.

Total Interest. What the borrowing itself cost, stripped of the money you were always going to repay. This is the number to judge the offer on.

The arithmetic under all of them is the standard amortising payment formula, run separately on each side, with the monthly rate as the annual rate divided by twelve and the number of payments as the term multiplied by twelve. Total payment is the monthly figure multiplied by the number of months, annual payment is it multiplied by twelve, and total interest is the total payment less the amount borrowed.

Twenty thousand, two offers

A borrower needs 20,000. Two lenders come back:

• Offer A: 3 years at 7.0 percent.
• Offer B: 5 years at 6.5 percent.

Offer B has the better rate and the smaller payment. It also costs 1,247.87 more.

That is the whole reason to run a comparison rather than eyeball two rates.

The lower rate that costs more

It is worth being precise about why the cheaper-looking offer is the more expensive one, because the instinct to compare rates is strong and usually reliable.

Rate is a price per year. Total interest is that price multiplied by how long you keep the money. Offer B charges half a percentage point less, and it charges it for two extra years, on a balance that stays higher for longer because you are repaying it more slowly.

Two extra years beats half a point comfortably, and it usually does. As a rough guide, term does more to your total interest than a rate difference of under a point, and the gap widens as the loan gets longer.

None of which makes Offer B wrong. It costs 226.22 less every month, and if that difference is what makes the loan survivable then it is the correct choice regardless of the total. A cheaper loan you default on in month nine is not cheaper.

The honest way to read the table is as two separate questions rather than one.

Can I carry this? Read the monthly payment row. If only one option passes, the comparison is over and the total interest is irrelevant.

What is it costing me? Read the total interest row. If both options pass the first test, this is the one that decides, and the difference is money you keep.

Where it gets genuinely interesting is when both are affordable. Then Offer B's lower payment is worth 226.22 a month of breathing room, and Offer A's shorter term is worth 1,247.87 in total. Whether flexibility now beats money later depends on how secure your income is and what else that 226 would be doing.

The row nobody else prints

Most comparison tools give you monthly and total. This one also gives you the annual figure, and it earns its place for a specific kind of borrower.

If your income does not arrive in twelve equal pieces, a monthly payment is an awkward unit to plan in. A farmer with two harvests, a contractor paid on completion, a business with a heavy season and a quiet one, all think in years rather than months. For them, 7,410.50 a year is a more meaningful number than 617.54 a month, even though the loan is repaid monthly.

It is also the right unit for comparing a loan against something it is funding. If borrowing 20,000 buys equipment that adds 9,000 a year to your takings, then Offer A at 7,410.50 a year clears its own cost and Offer B at 4,695.88 clears it more comfortably. That comparison is invisible in a monthly figure and obvious in an annual one.

One caution. The annual figure is twelve monthly payments, so it assumes you make all twelve. It is a planning number, not a licence to pay once a year. Missing eleven monthly payments and settling up in December is not something any lender will accept.

Making sure you are comparing offers

The calculator holds the loan amount steady, which handles the biggest source of a misleading comparison. A few things still sit outside the boxes and can quietly decide the answer.

Fees. If one lender charges a processing fee and the other does not, that cost never appears here. Where a fee is added to the loan rather than paid up front, the two offers genuinely involve different amounts, and the cleanest way to handle it is to run the fee-inclusive amount for both and note which side is carrying the extra.

The kind of rate. Both boxes should hold the same kind of number. A reducing balance rate against a flat rate is not a comparison, since a flat rate is worth roughly 1.8 times itself in reducing balance terms. The loan payment calculator covers that distinction in detail.

Fixed against floating. A fixed rate for the whole term and a floating rate that could move are different products, not two versions of the same one. If one offer floats, run it again a few points higher and see whether it still wins.

Prepayment terms. If you expect to clear the loan early, a penalty clause can outweigh a rate difference entirely, and it will not show up in any of these four rows.

The table tells you which offer is cheaper on the terms as written. What it cannot see is whether they were written on the same basis, and that is worth a minute with both documents before you take its word for it.

Questions people ask

Why is there only one loan amount box?

Because you are comparing two offers on the same borrowing. Holding the amount steady means any difference in the results comes from the terms rather than from one side simply being a smaller debt.

Is the offer with the lower rate always cheaper?

No. On 20,000, a 5 year loan at 6.5 percent costs 1,247.87 more in total interest than a 3 year loan at 7.0 percent, because the extra two years outweigh the half point of rate.

Which row should I actually decide on?

Both the monthly payment and the total interest, in that order. Affordability first, since an option you cannot carry is not an option. Cost second, to choose between the ones you can.

What is the annual payment row for?

Budgeting in years rather than months, which suits seasonal income and small businesses. It is twelve monthly payments, so it assumes you make all twelve on schedule.

Does it include fees?

No, it models the loan itself. If one lender charges an arrangement fee, add it to that side's loan amount if it is being financed, or note it separately if you are paying it in cash.

Can I compare a flat rate offer against a reducing balance one?

Not directly. Convert the flat rate first, since a flat rate is worth roughly 1.8 times itself in reducing balance terms. Entering both as they are quoted makes the flat offer look far better than it is.

What if I have three offers?

Run the two most promising, then run the winner against the third. Two rounds gets you there.

Can I compare two rates over the same term?

Yes, and it is the cleanest comparison available. Put the same number of years in both term boxes and only the rates differ, so every row is telling you about the rate alone.

References

The payment relation used on both sides is the standard amortisation formula for a level annuity, under which the loan amount equals the present value of the payments, as set out in university financial mathematics materials for the actuarial syllabus. The treatment of a quoted annual rate as a periodic rate multiplied by the number of periods in a year follows Regulation Z, which also sets out the actuarial method under which the unpaid balance is increased each period by the finance charge earned and reduced by the payment made.

1. J. Robert Buchanan, Millersville University, Loan Repayment, MATH 372 Financial Mathematics I. https://sites.millersville.edu/rbuchanan/math372/LoanRepayment-handout.pdf
2. Miguel A. Arcones, Binghamton University, Manual for SOA Exam FM, Chapter 4: Amortization and Sinking Funds, Section 4.1 Amortization Schedules. https://people.math.binghamton.edu/arcones/exam-fm/sect-4-1.pdf
3. Consumer Financial Protection Bureau (CFPB), Regulation Z, Appendix J to Part 1026: Annual Percentage Rate Computations for Closed-End Credit Transactions. https://www.consumerfinance.gov/rules-policy/regulations/1026/j/
4. Consumer Financial Protection Bureau (CFPB), What Is the Difference Between a Mortgage Interest Rate and an APR? https://www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-mortgage-interest-rate-and-an-apr-en-135/