Understanding loan costs

Loan offers are written to make the monthly payment the hero. The monthly payment is the least useful number on the page. Here's how to read the ones that matter.

APR is the real price

The annual percentage rate bundles the interest rate and most required fees into one comparable number. Two loans can have the same interest rate while one costs far more, because of fees. APR exposes that. When you compare offers, compare APRs. Lenders are required to tell you the APR before you sign.

Origination fees

Many personal loans charge an origination fee, often between 1 and 10 percent of the loan amount, and it usually comes out of your funds up front. Borrow $10,000 with a 5 percent origination fee and $9,500 lands in your account, while you repay interest on the full $10,000. If you need a specific amount in hand, say so when talking to lenders, and ask whether the fee is deducted or added.

The term changes everything

Stretching a loan over more years shrinks the monthly payment and grows the total interest. As a made-up example for illustration only: $10,000 repaid over three years at some fixed rate costs less in total interest than the same $10,000 at the same rate over six years, even though the six-year version has the friendlier monthly payment. Always ask for the total amount you'll have repaid by the end of the term. That single question cuts through most of the fog.

Watch for these in the fine print

Prepayment penalties, which charge you for paying the loan off early. Late fee schedules. Whether the rate is fixed or variable. Optional add-ons like credit insurance that quietly inflate the payment. None of these are necessarily deal breakers, but you should know they're there before you sign, not after.