What will a loan cost you? It mostly depends on two things: How long you take to pay it back, or the term, and the interest rate you’re being charged.
Compare two loans for 10,000. Note how the term affects the monthly payment and the total cost of the loan.
Term comparison — Based on 10% Annual Percentage Rate (APR)
|Loan conditions||Loan A||Loan B|
|Term||25 months||49 months|
|Total cost of loan||$11,106||$12,215|
|Total interest paid||$1,106||$2,215|
*Please note: the final month’s loan payment may vary from the regular monthly payment.
As for the term, you often will have a choice to make. You may be tempted to have a longer term loan because your monthly payments will be lower, but as you can see in this example, with the longer-term loan, the total cost of the loan is higher because you’re paying more in interest.
By repaying in 49 months vs. 25 months, this borrower would end up paying more than $1,100 more in interest!
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