How Loan Interest Actually Works: A Plain-English Guide
Why two loans with the same rate can cost very different amounts.
Two loans can advertise the same interest rate and cost genuinely different amounts, because the rate alone doesn't tell you the whole story — the term length matters just as much, and it's the part people tend to skim past.
The rate is annual, the payments are monthly
A loan's interest rate is normally quoted per year, but you're paying it back in monthly instalments. Each month's payment is split between paying down the actual amount you borrowed (the principal) and paying interest on what's still outstanding. Early in the loan, more of each payment goes toward interest; later on, more goes toward the principal — even though the total monthly payment stays the same.
Why a longer term costs more overall
Stretching the same loan amount over a longer term lowers the monthly payment, which is the appeal, but it means you're paying interest on the outstanding balance for more months. Two loans at the identical interest rate, same amount, different terms, can have meaningfully different total interest paid by the end — the shorter term almost always costs less overall, even though each individual payment is higher.
What to actually compare
Comparing loan offers on the interest rate alone misses this. The number that reflects the real cost is the total amount repaid by the end — principal plus every bit of interest across every payment. That's the figure worth putting two offers side by side on, not just the headline rate.
Run your own numbers
Our loan calculator shows the monthly payment and total interest for any amount, rate, and term, so you can compare offers on the number that actually matters rather than the one that's easiest to advertise.
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