Comparing Personal Loan Offers: APR, Fees and Total Cost

Two personal loan offers can look similar and cost very different amounts. The monthly payment is the number lenders put up front, but it’s only part of the picture. To compare loans fairly, you need the APR, the fees, the term and the total you’ll repay, all measured for the same amount of money in your hands.

The short answer

Compare these five things for every offer:

1. APR. The annual cost of the loan, including certain fees. Lenders must show it before you sign.
2. Origination fee. Often taken out of the money you receive.
3. Term. A longer term means a smaller payment but usually more total interest.
4. Monthly payment. Make sure it fits your budget with room to spare.
5. Total cost. What you repay minus what you receive.

A worked example: the lower rate that costs more

Here are two made-up offers for a $10,000 loan over 36 months.

Offer B has the lower rate and the lower payment, but it costs about $265 more because of the fee, and its APR is higher. Offer A is the cheaper loan. This is why the APR and the total cost matter more than the rate or the payment.

One more thing to notice: if you needed a full $10,000 in hand, you’d have to borrow more under Offer B to make up for the fee, which would make it cost even more.

Prequalifying vs. applying

Many lenders let you check estimated terms before you apply. This is often called prequalifying, and it usually uses a soft credit inquiry, which doesn’t affect your score. A formal application usually uses a hard credit inquiry, which can lower your score a little for a while.

• Ask each lender whether a step is a soft or a hard check before you submit.
• Treat prequalified numbers as estimates. The final rate, amount and approval can change after the lender verifies your information.
• If you plan to submit formal applications, do them close together. Many scoring models count several inquiries for the same type of loan in a short period as one, though the window varies.

A checklist for each offer

• What is the APR?
• Is there an origination fee, and how much is it in dollars?
• How much money will I actually receive?
• What is the term, and the monthly payment?
• What are the late fees?
• Is there a penalty for paying off early?
• Is the rate fixed or variable?
• How soon would I get the money?

Red flags

• A lender that asks you to pay a fee before it funds the loan. Real origination fees come out of the loan itself.
• Pressure to accept an offer right now.
• A refusal to show the APR or the total cost in writing.
• A “guaranteed approval” claim. No lender can promise approval before reviewing your information.

A simple way to choose

1. Decide the amount you need and the payment you can afford.
2. Gather two or three offers, using soft checks where you can.
3. For each one, write down the money you’d receive, the payment, the total repaid and the APR.
4. Pick the loan with the lowest total cost that has a payment you’re comfortable with.
5. Read the final paperwork before you sign. If anything differs from the offer, ask why.

If you’re weighing a loan secured by your home instead, see personal loan vs. home equity loan. If you’re borrowing to pay off cards, see debt consolidation loans.

This article is for general information and isn’t financial, tax or legal advice. Example rates, fees and payments are illustrations, not offers.