Total Interest Cost of a Loan
Total Interest Cost of a Loan
All interest paid over the life of an amortizing loan, from the first payment until the balance reaches zero, summed from the schedule so the final capped payment is handled exactly.
When to use: The single most useful number when comparing loan offers: two loans with the same monthly payment can differ enormously in lifetime interest if their terms differ.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| TotalInterest | Total Interest | Interest paid over the whole loan | $ |
| PV | Original Loan | Original loan amount | $ |
| PMT | Payment | Periodic payment amount | $ |
| k | Interest Rate | Annual interest rate | % |
| m | Payments per Year | Number of payments per year | integer |
Real-Life Examples
Example 1: 30-Year Mortgage
A $300,000 mortgage at 6.5% paid at $1,896.20 per month until it is gone. Total interest?
Given
Step-by-Step
The borrower pays $382,637 of interest on a $300,000 loan, more than the amount borrowed. This is why extra principal payments early in a long loan are so powerful.
Example 2: 5-Year Auto Loan
A $25,000 car loan at 7% paid at $495.03 per month. Total interest?
Given
Step-by-Step
About 19% on top of the amount borrowed. A shorter term keeps total interest modest even at a higher rate.
Frequently Asked Questions
That works when the final payment is a full one. The schedule handles the common case where the last payment is smaller than the rest, and it also reveals when a payment is too small to ever retire the loan.
The balance grows instead of shrinking and the loan never pays off, so the formula returns an error rather than a misleading number.