Comparing two loan offers: total cost beats monthly payment
Two financing offers almost never share the same rate and the same term, which makes comparing monthly payments alone misleading. A lower payment can still add up to a bigger bill once you count every month you pay it, plus whatever fees came with the offer. The fix is one extra step: multiply the payment out to the full term, add the fees, and compare that total instead.
The method
Monthly payment on an amortizing loan: M = P × r / (1 − (1 + r)^−n), where P is the amount financed, r is the monthly rate (annual rate ÷ 12 ÷ 100), and n is the number of months. Once you have M for an offer, total cost = M × n + fees. Do that for both offers and compare the totals — not the payments. A longer term almost always lowers M, because the same principal is spread over more months, but it also usually raises the total, because you're paying interest for longer.
A real example: two ways to finance $25,000
Option A: 6.9% for 60 months, $400 in fees. Option B: 4.9% for 72 months, $900 in fees.
- Option A's monthly rate:
6.9 ÷ 12 ÷ 100 = 0.00575. Payment:25,000 × 0.00575 / (1 − 1.00575^−60) ≈ $493.85. - Option A total:
493.8513 × 60 + 400 ≈ $30,031.08. - Option B's monthly rate:
4.9 ÷ 12 ÷ 100 ≈ 0.0040833. Payment:25,000 × 0.0040833 / (1 − 1.0040833^−72) ≈ $401.46. - Option B total:
401.4647 × 72 + 900 ≈ $29,805.46.
Option B has the smaller monthly payment by almost a hundred dollars and still comes out $225.62 cheaper overall — the lower rate outweighs both the longer term and the bigger fee. In this case, "lower payment" and "lower cost" happen to point the same direction. That's not guaranteed, which is the whole reason to check both.
A second example: the trap in reverse
Financing an $18,000 car. Option A: 7.5% for 48 months, $250 in fees. Option B: 5.5% for 60 months, $600 in fees.
- Option A payment:
18,000 × (0.075÷12) / (1 − (1+0.075÷12)^−48) ≈ $435.22. Total:435.2202 × 48 + 250 ≈ $21,140.57. - Option B payment:
18,000 × (0.055÷12) / (1 − (1+0.055÷12)^−60) ≈ $343.82. Total:343.8209 × 60 + 600 ≈ $21,229.26.
Option B's payment is $91.40 a month lower — a difference easy to notice at a dealership. But over the full term, Option B costs $88.68 more than Option A, because 12 extra months of interest and a $350 bigger fee outweigh the smaller monthly rate. Anyone comparing payments alone would pick the more expensive offer.
Why the fee line isn't optional
Fees don't average out over the term the way interest does — they're added once, flat, to the total. A $900 fee on a 72-month loan works out to $12.50 a month if you spread it evenly, small enough to vanish from a payment comparison, but it's still $900 that has to show up somewhere in the total. Leaving a fee out of one offer and not the other is the fastest way to make an unfair comparison look fair.
What this doesn't include
This is principal, interest and the fees you enter — nothing else. It doesn't know about prepayment penalties, rate locks, balloon payments, or whether either loan is even the type it looks like (a lease has different math entirely). It's not a recommendation to take either offer, refinance, or borrow at all — it's arithmetic on the four numbers each lender already gave you.
Run your own numbers
The free Rate Comparison (Side by Side) tool runs this instantly for your own two offers, entirely on your device.