Which loan costs less — a lower rate or a shorter term?

Both factors reduce total interest, but rate affects it per period while term affects how many periods you pay. Generally: a shorter term saves more total interest than a marginally lower rate on a longer term. Example: $20,000 at 6.5% for 5 years = $3,383 total interest. At 4.9% for 7 years = $3,620 total interest. Despite the lower rate, the 7-year loan costs more because of the extra 2 years of payments.

What is the difference between APR and interest rate in a loan?

The interest rate is the base borrowing cost as a percentage of the loan principal. APR (Annual Percentage Rate) includes the interest rate plus fees — origination fees, broker fees, closing costs, and points. APR is always equal to or higher than the interest rate. When comparing loans, compare APRs (not just interest rates) for a true cost comparison. On a mortgage, the rate might be 6.5% while APR is 6.8% due to origination fees.

Should I choose a lower monthly payment or lower total cost?

It depends on your cash flow vs. total cost priority. A shorter loan term (higher monthly payment) saves more in total interest. A longer term (lower monthly payment) frees up cash each month. If you can comfortably afford the higher payment, the shorter term is usually better financially. If cash flow is tight, the lower payment may be necessary. Consider: can you make extra principal payments on the longer loan to reduce total interest voluntarily?

How does loan amount affect total interest paid?

Total interest scales roughly proportionally with loan amount at the same rate and term. Double the loan, roughly double the interest. This is why making a larger down payment on a car or home has an outsized effect on total interest paid — it reduces the principal before the amortization clock starts. A $5,000 larger down payment on a 30-year mortgage at 6.5% saves approximately $10,000–15,000 in total interest.

What happens to total interest if I make extra payments?

Extra principal payments directly reduce your loan balance and therefore the base on which future interest is calculated. This shortens the loan term and reduces total interest paid. On a 30-year mortgage, one extra payment per year can shorten the term by 4-5 years and save tens of thousands in interest. Even small regular extra payments add up significantly over time due to the compounding nature of interest.

How is monthly loan payment calculated?

Monthly payment = P × [r(1+r)^n] / [(1+r)^n - 1], where P = loan principal, r = monthly interest rate (annual rate ÷ 12), and n = total number of monthly payments (years × 12). Example: $20,000 loan at 6.5% for 5 years: r = 0.065/12 = 0.005417, n = 60. Payment = 20000 × [0.005417 × (1.005417)^60] / [(1.005417)^60 - 1] = $391.32/month.

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Loan Comparison Calculator

To compare two loans side by side, enter each loan amount, annual interest rate, and term. The monthly payment formula is: P × [r(1+r)^n] / [(1+r)^n - 1] where P = principal, r = monthly rate, n = number of months. The loan with the lower total interest paid costs less overall, even if the monthly payment is higher. A shorter term + lower rate always minimizes total interest.

Compare two loans side by side. Enter different loan amounts, interest rates, and terms to see which loan costs less in total interest, monthly payment, and overall. Ideal for comparing auto loans, personal loans, mortgages, or any two lending offers.

Quick Presets

Loan Details

Loan A

Loan Amount ($)

Annual Rate (%)

Loan Term

Unit

Loan B

Loan Amount ($)

Annual Rate (%)

Loan Term

Unit

Comparison Results

	Loan A	Loan B	Difference
Monthly Payment	$391.32	$281.74	$109.58/mo
Total Interest	$3,479.38	$3,666.11	$186.73
Total Cost	$23,479.38	$23,666.11	$186.73

Recommendation

Loan A saves $186.73 in total interest. If minimizing total cost matters most, Loan A is the better choice. Note that Loan A has a higher monthly payment of $391.32 vs $281.74 for Loan B.

Lower payment does not mean lower cost. A longer term often means lower monthly payments but more total interest paid.

How to Use

1
Enter Loan A details
Fill in the loan amount, annual interest rate, and loan term for the first loan. Use the preset buttons (Auto loan, Personal loan, Mortgage) to load realistic examples.
2
Enter Loan B details
Fill in the same fields for the second loan with a different rate or term. For example, compare a 5-year loan at 6.5% vs a 7-year loan at 4.9% to see the trade-off.
3
Compare the results
The side-by-side table shows monthly payment, total interest paid, and total cost for both loans. Green highlighting indicates which loan wins on each metric.
4
Read the recommendation
The recommendation box explains which loan costs less in total interest and notes the monthly payment trade-off. Lower monthly payment does not always mean lower total cost.

Frequently Asked Questions

Which loan costs less — a lower rate or a shorter term?: Both factors reduce total interest, but rate affects it per period while term affects how many periods you pay. Generally: a shorter term saves more total interest than a marginally lower rate on a longer term. Example: $20,000 at 6.5% for 5 years = $3,383 total interest. At 4.9% for 7 years = $3,620 total interest. Despite the lower rate, the 7-year loan costs more because of the extra 2 years of payments.
What is the difference between APR and interest rate in a loan?: The interest rate is the base borrowing cost as a percentage of the loan principal. APR (Annual Percentage Rate) includes the interest rate plus fees — origination fees, broker fees, closing costs, and points. APR is always equal to or higher than the interest rate. When comparing loans, compare APRs (not just interest rates) for a true cost comparison. On a mortgage, the rate might be 6.5% while APR is 6.8% due to origination fees.
Should I choose a lower monthly payment or lower total cost?: It depends on your cash flow vs. total cost priority. A shorter loan term (higher monthly payment) saves more in total interest. A longer term (lower monthly payment) frees up cash each month. If you can comfortably afford the higher payment, the shorter term is usually better financially. If cash flow is tight, the lower payment may be necessary. Consider: can you make extra principal payments on the longer loan to reduce total interest voluntarily?
How does loan amount affect total interest paid?: Total interest scales roughly proportionally with loan amount at the same rate and term. Double the loan, roughly double the interest. This is why making a larger down payment on a car or home has an outsized effect on total interest paid — it reduces the principal before the amortization clock starts. A $5,000 larger down payment on a 30-year mortgage at 6.5% saves approximately $10,000–15,000 in total interest.
What happens to total interest if I make extra payments?: Extra principal payments directly reduce your loan balance and therefore the base on which future interest is calculated. This shortens the loan term and reduces total interest paid. On a 30-year mortgage, one extra payment per year can shorten the term by 4-5 years and save tens of thousands in interest. Even small regular extra payments add up significantly over time due to the compounding nature of interest.
How is monthly loan payment calculated?: Monthly payment = P × [r(1+r)^n] / [(1+r)^n - 1], where P = loan principal, r = monthly interest rate (annual rate ÷ 12), and n = total number of monthly payments (years × 12). Example: $20,000 loan at 6.5% for 5 years: r = 0.065/12 = 0.005417, n = 60. Payment = 20000 × [0.005417 × (1.005417)^60] / [(1.005417)^60 - 1] = $391.32/month.