The "price" of a loan is never the amount you borrow. Three numbers matter: the principal (what you receive), the interest (the lender's fee for time), and the total cost (principal + interest + fees). The monthly payment tells you only part of the story.
The payment formula
Like a mortgage, most consumer loans use the amortized payment formula M = P × [ r(1 + r)^n ] ÷ [ (1 + r)^n − 1 ], with r the monthly rate and n the number of months.
Worked example: a $20,000 car loan
Borrow $20,000 at 7% for 5 years (60 months). The monthly rate is 0.07 ÷ 12 = 0.005833 and n = 60:
- Monthly payment: $396.02
- Total repaid: 396.02 × 60 = $23,761.44
- Interest paid: $3,761.44
So a $20,000 car actually costs $23,761 before you add tax, title, and dealer fees.
Worked example: a $10,000 personal loan
Borrow $10,000 at 11% for 3 years (36 months):
- Monthly payment: $327.39
- Total repaid: $11,785.94
- Interest paid: $1,785.94
A shorter term raises the payment but slashes the interest. Stretch that same $10,000 over 60 months and the payment falls, but total interest climbs well past $3,000.
Principal vs interest vs total cost
| Loan | Principal | Interest | Total cost |
|---|---|---|---|
| $20,000 car, 7%, 5 yrs | $20,000 | $3,761.44 | $23,761.44 |
| $10,000 personal, 11%, 3 yrs | $10,000 | $1,785.94 | $11,785.94 |
Why the term matters more than the rate
Stretching a loan spreads the principal over more months, so the payment drops — but you pay interest on the balance for longer. A $20,000 balance at 7% costs about $3,761 in interest over 5 years and over $7,000 over 10 years, even though the monthly payment falls from $396 to about $232. Total cost, not the monthly payment, is the honest comparison.
Watch the add-ons
Dealer financing, extended warranties and payment-protection insurance are often rolled into the principal. Each dollar added there also accrues interest, so a $2,000 warranty on a 5-year loan at 7% really costs closer to $2,400 by the time the last payment clears.
Don't forget the fees
Origination fees, documentation charges and prepayment penalties are not interest, but they are still part of what you pay. Add them to the total cost — or convert them into a rate using our interest rate calculator. To compare offers fairly, model each one in the loan calculator and check the APR vs interest rate guide.