Total Cost of Credit Calculator and Formula

The total cost of credit is the amount paid for borrowing, beyond the amount borrowed; for a fixed-rate, level-payment loan, it is the total of payments minus the principal. Enter the loan amount, annual percentage rate (APR), and term to estimate the monthly payment and total interest; this calculator excludes fees and other charges, so it does not calculate every possible component of a lender’s disclosed total credit cost.

Formula

For a fixed-rate loan repaid by equal monthly payments, the monthly payment is the principal multiplied by the monthly interest rate, divided by one minus the discount factor for all payments. In symbols:

• Monthly payment: M = round[P × r / (1 − (1 + r)⁻ⁿ), 2]
• Estimated total interest: I = M × n − P
• Monthly rate: r = APR / 1,200
• Number of payments: n = years × 12

P is the loan principal in dollars, APR is the entered annual percentage rate, r is the monthly rate as a decimal, n is the number of monthly payments, M is the monthly payment in dollars rounded to cents, and I is the estimated interest in dollars. The calculator uses the rounded monthly payment to derive total interest, as actual payment amounts are ordinarily expressed in cents. Its total of payments is M × n; subtracting the original principal gives the interest estimate.

Worked Example

Using the defaults—$20,000 principal, 8% APR, and 5 years:

1. Convert the APR to a monthly decimal rate: r = 8 / 1,200 = 0.0066667.
2. Convert the term to payments: n = 5 × 12 = 60.
3. Apply the payment formula: M = round[20,000 × 0.0066667 / (1 − (1.0066667)⁻⁶⁰), 2] = $405.53 per month.
4. Calculate the total of the rounded payments: $405.53 × 60 = $24,331.80.
5. Subtract the principal: $24,331.80 − $20,000 = $4,331.80 total interest.

This is an estimate under the stated assumptions. A lender’s payment schedule may differ because of payment dates, rounding conventions, fees, or other terms.

Assumptions

• The interest rate stays fixed throughout the stated term.
• There are equal monthly payments, made at the end of each monthly period.
• Interest accrues monthly using the APR divided by 12.
• Fees, taxes, insurance, optional products, late charges, and other costs are not included.

What Total Cost of Credit Means

“Total cost of credit” can refer broadly to the cost of using borrowed money, but its exact meaning depends on the product and the way a disclosure defines it. For a simple installment loan, a useful starting calculation is total scheduled payments minus the amount financed. If the loan has no added charges and follows the fixed-rate, equal-payment assumptions above, that difference is the total interest.

Interest is not always the entire cost. An origination charge, an account fee, or another required borrowing charge can add to what the borrower pays. Some disclosures present a total amount payable or a finance charge under defined rules; those figures may include or treat charges differently from this calculator’s interest-only estimate. Check the lender’s written disclosure for the figure that applies to the specific offer.

How to Use and Interpret the Estimate

Enter the amount borrowed, the APR shown for the offer, and the length of the repayment term in years. The first result is the estimated monthly payment; the second is estimated total interest over the full term. The calculation assumes the borrower makes every scheduled payment on time and does not pay extra or change the loan.

For a simple comparison, keep the principal and term consistent when examining how different APR inputs affect the estimate. This is a mathematical comparison, not a forecast of which terms a lender may offer. Obtain the actual APR, fees, payment schedule, and total repayment figure from the lender; do not substitute a promotional or hypothetical rate for the rate in the offer documents.

Costs This Calculator Does Not Include

The result is intentionally limited to interest implied by the entered principal, APR, and term. It does not add loan fees or calculate the effect of a separate upfront charge. If a fee is paid in cash, include it separately when reviewing the overall outlay. If a fee is added to the balance, the amount financed may be higher than the amount of cash received; use the disclosed amount financed as the principal only if that matches the loan terms you are evaluating.

Variable-rate loans, interest-only periods, deferred payments, balloon payments, irregular payment dates, and changing balances do not follow this calculator’s level-payment model. A credit card balance or line of credit may also change as purchases, repayments, and rate changes occur. For those products, the actual cost depends on account activity and the contract’s calculation method.

Common Misunderstandings

• APR and total cost are different. APR is a rate expressed annually; total interest is a dollar amount accumulated across the repayment schedule. The APR alone does not reveal the full amount paid without the principal and term.
• A lower payment does not necessarily mean lower total interest. A longer term usually means more payment periods, so the total paid can rise even if each payment is smaller. The actual result depends on the entered terms and charges.
• Interest is not automatically every borrowing cost. Fees and other charges may be separate. Review the disclosure rather than assuming the calculator’s interest figure is the complete cost.
• Rounding matters. This estimate rounds the monthly payment to cents and multiplies that rounded amount by the number of months. The lender may adjust the final payment or apply a different rounding schedule.

Frequently Asked Questions

How do you calculate the total cost of credit?
For a fixed-rate installment loan, calculate the scheduled payment, multiply it by the number of payments, then subtract the amount borrowed to estimate interest. Add any applicable fees separately to assess broader borrowing costs.

Is total cost of credit the same as total interest?
Not necessarily. Total interest is the interest paid over the loan term. Total cost of credit may also account for fees or other charges, depending on the product and the definition used in its disclosure.

Does APR include fees?
APR may reflect certain costs under the applicable disclosure method, but the calculator treats the entered APR as an interest rate and does not separately model fees. Use the lender’s disclosure to see how the quoted APR and charges are presented.

Why does a longer loan term increase total interest?
A longer term generally means interest accrues over more monthly periods. Even when the monthly payment is lower, the sum of payments can be higher. The exact difference depends on principal, rate, term, and fees.

Can this calculator estimate a variable-rate loan?
Not accurately if the rate can change. It assumes one fixed APR and equal monthly payments for the entire term. A variable-rate loan needs a schedule that accounts for rate changes and the lender’s specific terms.

The result is an estimate, and the lender’s disclosure gives the exact figures.

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in p | Loan amount | $ | 20000 | 1 | 100000000
in apr | Interest rate (APR) | % | 8 | 0.01 | 100
in yrs | Loan term | years | 5 | 0.0833 | 50
out pmt | Monthly payment | $ | round(p * (apr / 1200) / (1 - (1 + apr / 1200) ^ -(yrs * 12)), 2) | 2
out int | Total interest | $ | pmt * yrs * 12 - p | 2