Comparing offers properly
Lenders rarely present offers in a comparable format. One quotes a low rate with a large origination fee; another quotes a higher rate with no fee but a longer term. The only fair comparison is total cost of credit — interest plus every fee — over the life of each loan, alongside the payment you have to live with each month.
Rate versus term
Rate and term pull in opposite directions. A lower rate over a longer term can easily cost more in total than a higher rate over a shorter one. On $25,000, five years at 9.5% costs about $6,400 in interest; three years at 7.9% costs about $3,150. The shorter loan wins by a wide margin even though it carries a payment roughly $250 higher.
Fees that belong in the comparison
- Origination or administration fees, whether deducted up front or added to the balance.
- Application, appraisal or documentation fees.
- Mandatory insurance products bundled into the loan.
- Prepayment penalties, if you have any realistic chance of paying early.
Things the numbers do not capture
Prepayment flexibility, whether the rate is fixed or variable, hardship and deferment options, whether the servicer is likely to sell the loan, and how the payment interacts with the rest of your budget. A loan that is $20 cheaper in total but leaves no room for an unexpected expense is not the better loan.
A simple decision rule
Pick the shortest term whose payment you can comfortably sustain in a bad month — not an average month. Then, among loans at that term, take the lowest APR. That sequence resolves most comparisons without agonising.