How this calculator works
A personal loan is repaid in level instalments over a fixed term, usually without security. Lenders often charge an origination fee, which is taken out of the proceeds, so you receive less than the stated loan amount while repaying the full amount. The effective annual rate shown here is the rate that makes the instalments balance the money you actually received, compounded monthly. Comparing that figure with the contract rate shows what the fee costs. Some lenders add the fee to the balance instead of deducting it; in that case enter the larger amount as the loan and the fee as zero.
Formula
i = contract rate / 12; A = P × i / (1 - (1 + i)^(-n)). Amount received = P - fee. The fee rate f solves A × (1 - (1 + f)^(-n)) / f = P - fee. Effective annual rates are (1 + i)^12 - 1 and (1 + f)^12 - 1. Total cost of credit = n × A - (P - fee).
Worked example
A $15,000 loan at 8.5% over 60 months has a payment of $307.75 and $3,464.88 of contract interest. With a $300 origination fee the amount received is $14,700, and the effective annual rate rises from 8.84% to 9.78%. Total cost of credit is $3,764.88 because the fee is paid from the proceeds.
Advertisement
Frequently asked questions
Why does the effective rate differ from the contract rate?
The contract rate applies to the full loan amount, but you only receive the amount after the fee. Repaying the full amount using less money means the real cost per dollar borrowed is higher.
What if the fee is added to the balance?
Then the loan amount is the total including the fee and the proceeds are the full amount you need. Enter that larger amount and a zero fee to keep the calculation accurate.
Are late fees or insurance included?
No. The calculation covers the contractual interest and the origination fee only. Optional insurance, late charges and penalty rates would raise the real cost further.
Should I compare offers by payment or by rate?
Compare total cost of credit and the effective annual rate over the same term. The lowest payment can simply mean a longer term, which usually costs more in total.