How to compare loan offers

Loan offers come with a dozen numbers on the paperwork and only one of them is the one you should actually compare. Principal, rate, APR, origination fee, points, term, monthly payment, total interest, prepayment penalty — shopping by the monthly payment alone is how people end up paying $5,000 more for the same loan. This guide walks through what to compare, what to ignore, and the one calculation that tells you which offer is really cheaper.

APR, not interest rate

The interest rate is what the lender charges on the balance. The APR bakes in most fees — origination, processing, discount points — and expresses the true annual cost as a single percentage. Two lenders can quote the same 7.0% rate, but if Lender A charges $2,000 in fees and Lender B charges zero, their APRs might be 7.4% vs 7.0%. Compare APR between offers, not rate.

One caveat: APR assumes you hold the loan to term. If you’ll likely refinance or pay off early, fee-heavy offers with a slightly lower rate look worse than APR implies. For short holding periods, compare total-dollars-paid instead of APR.

The total-cost calculation — what actually matters

For every offer, compute: Total cost = (Monthly payment × Number of months) + Up-front fees. Then subtract principal. That’s the true dollar cost of the money.

Example: $20,000 loan, 5 years.

Offer A: 6.5% rate, $0 fees. Monthly = $391.32. Total paid = $23,479. Interest cost: $3,479.

Offer B: 5.9% rate, $800 origination. Monthly = $385.64. Total paid = $23,138 + $800 fee = $23,938. Interest + fees: $3,938.

The “lower rate” offer B is actually $459 more expensive. The monthly is $5.68 cheaper but the fee eats it up. This is exactly why APR exists, and why lenders advertising “lowest rate” love to hide the origination line.

Term — the biggest hidden variable

A longer term always means lower monthly payments and more total interest. Lenders quote terms that make payments attractive. Don’t anchor to the monthly — always compare same-term vs same-term, or use total-dollars.

Same $20k at 6.5%: 3-year term = $613/mo, $2,063 interest. 5-year = $391/mo, $3,479 interest. 7-year = $294/mo, $4,727 interest. Picking 7-year over 3-year costs you an extra $2,664 — a 129% increase in interest — for the same loan.

Prepayment penalties — always check

Some loans (rare in mortgages, common in subprime auto and some personal loans) charge a penalty if you pay early. A 2% prepayment penalty on $20k is $400 out of your pocket for paying ahead. Read the disclosure — if you see “prepayment penalty,” factor it in or reject the offer.

Origination vs discount points

Origination fee is what the lender charges to write the loan. Usually 0.5–2% of principal. Unavoidable but negotiable.

Discount points are optional — you pay 1% of principal to buy down the rate, typically by 0.25%. Break-even math: divide point cost by monthly savings. If break-even is under half your holding period, points are worth it. Otherwise skip.

The 4-column comparison table

Make a simple comparison across all offers with four columns only: (1) APR, (2) monthly payment, (3) total cost (payment × months + fees), (4) prepayment penalty yes/no. Everything else is noise. The offer with lowest total cost and no prepayment penalty wins, full stop.

Soft-pull pre-qualification first

Pre-qualification is a soft credit inquiry — doesn’t ding your score, lets you see rates from multiple lenders before you formally apply. Most online lenders (SoFi, LightStream, Upstart, Marcus) offer it. Get 3–5 soft-pull quotes, then do the hard-pull application only on your top choice.

If you hard-pull multiple lenders, do it within a 14-day window — credit bureaus treat same-category rate-shopping hard pulls as one inquiry for scoring purposes. Spread them over a month and you’ll drop your score 10–20 points for nothing.

Red flags that eliminate an offer immediately

Mandatory insurance add-ons (credit life, disability) bundled into the payment — almost always overpriced. Decline or walk away.

Precomputed interest (you see it in subprime auto) — you pay the full interest up front regardless of when you pay off. Makes early payoff pointless. Find another lender.

Variable rate with no cap disclosed. Rate can move against you with no ceiling. Fine for HELOCs with caps, dangerous anywhere else.

Run the numbers before you sign

Plug each offer into the loan calculator, compute total cost, compare in your 4-column table. Pair with the debt payoff calculator if you’re consolidating multiple debts, and the mortgage calculator if the loan is for a home — mortgage math includes PITI and escrow that pure loan math misses.