A $5,000 personal loan over five years costs $1,111 more than over three
· 4 min read
Borrow $5,000 at 18% and you will be offered a choice of terms. Over three years the payment is $180.76 a month. Over five it is $126.97, which is $54 a month less. The five-year loan also costs $1,111 more in interest.
The same loan, three ways
The rate is a round example, not any lender’s. A lender sets the real one from your application. The personal loan calculator shows this table for the amount and rate on a quote of your own.
Over five years, the interest is more than half of what was borrowed. The loan was $5,000 in every case; only the time changed.
Why the cheaper payment costs more
Interest is charged each month on what is still owed. A smaller payment clears the balance more slowly, so there is more owed in every month and there are more months. Both push the same way.
Neither term is the right one in general. A lower payment that you can always meet and a higher one that saves interest are a trade, and the table only shows what each side of it costs.
The fee that comes out first
Some lenders keep an origination fee out of the loan before paying it over. Borrow $5,000 with a $250 fee and you receive $4,750, but repay $5,000 plus interest. If you needed $5,000 in hand, you would have to borrow more. Enter the fee in the calculator to see what you would actually receive.
The annual percentage rate on a loan offer is meant to fold fees like this into a single figure, which is why the APR is the number to compare between offers and can be higher than the interest rate beside it.
What this leaves out
- The rate you will be offered. It depends on your application and is the lender’s to set.
- Late fees and prepayment charges. Read the loan agreement for both.
- Whether to borrow. This shows what a loan costs. It has nothing to say about whether to take one.
An estimate from example figures, not financial advice.
