Breakdown
How it works
Lenders market the monthly payment; the number that matters is total cost = interest + fees. A longer term always lowers the payment and almost always raises the total cost.
Formula
Payment = PMT(amount, APR/12, months)
Total cost = payment × months − amount + fees
Worked example
20,000 at 6.9% over 60 months: 395 a month, cost 3,710. 20,000 at 5.9% over 84 months with a 250 fee: 291 a month but cost 4,712 — the cheaper rate is the dearer loan.
Frequently asked questions
Should I compare APR or total cost?
APR for like-for-like terms; total cost when the terms differ. APR includes fees but not the effect of a longer term.
Does early repayment change the answer?
If you will repay early, a loan with no early repayment charge and a lower rate wins even with a longer nominal term.
What about a 0% deal?
A 0% loan with a fee is not free — divide the fee by the amount to get the effective cost.