Comparing the Total Cost of a Private Loan
Two loan offers with the same interest rate can cost very different amounts by the time they are repaid. Comparing the total cost means adding up everything you will pay over the expected life of the loan, then checking what changes if the loan runs longer than planned.
Items to include
Start with interest over the expected term. Add lender fees charged at funding, any broker fee, legal costs for both sides where the borrower pays them, valuation or appraisal costs, and any renewal or extension charges. Include minimum interest provisions, which can mean paying a set amount of interest even if you repay early, and prepayment penalties.
Put it on one timeline
Write down when each cost is paid: at funding, monthly, at renewal, at maturity. A loan with a lower rate but higher fees can cost more if it will be repaid quickly, while a loan with a higher rate and lower fees can be cheaper over a short period. Converting everything to an annualized cost over your real timeline makes offers comparable.
Test a delay
Ask what happens if repayment comes three or six months later than planned. Extension fees, a rate step-up or a renewal fee can change the ranking of two offers. The loan that is cheapest when everything goes to plan is not always the cheapest when something slips.
Ask for it in writing
A lender should be able to set out the rate, every fee, the term, payment requirements and conditions in a term sheet. If a cost is not on the page, ask whether it exists before you commit.
This article provides general information and is not personal financial, tax, legal, or insurance advice. Obtain advice relevant to your circumstances before entering a financing arrangement.
