$20,000 Personal Loan over 4 years: what it costs each month

What a $20,000 personal loan over 4 years costs at different rates

The rate you are offered depends on your credit score (FICO or VantageScore), your income and how much you borrow. The same $20,000 over 4 years can cost very different amounts, so it is worth seeing the whole range before you apply.

Moving the rate by one percentage point, from 12% to 13%, changes the monthly payment by about $9.87 and the total interest by about $474.

The formula behind the payment

The payment on a fixed-rate loan is: amount × monthly rate ÷ (1 − (1 + monthly rate)^−months). For $20,000 over 48 months at 12% APR the monthly rate is 1.0000%, which gives $526.68. Multiplying by 48 months gives $25,280 repaid in total, so the cost of borrowing is $5,280.

Should you borrow $20,000 over 4 years or a different term?

A longer term lowers the monthly payment but you pay interest for longer. At 12% APR, repaying $20,000 over 2 years costs $941.47 a month and $2,595 in interest, while 5 years costs $444.89 a month and $6,693 in interest. That is $4,098 more for the lower payment.

Interest versus capital: where your payments go

Early payments are mostly interest. In year 1 of this $20,000 loan, $2,177 of your $6,320 goes on interest and $4,143 reduces what you owe. By the last year the split reverses, which is why paying off a loan early saves more in the early years than the later ones.

What happens if you overpay your $20,000 loan?

Paying a little extra each month cuts the balance faster, so less interest is charged. Check that your lender allows overpayments and whether there is a charge: many allow up to a set amount a year without one.

How to work out if the payment is affordable

A common check is to keep all debt repayments, including this personal loan, below about a third of your take-home pay. A $526.68 payment fits that guide if your monthly take-home pay is at least $1,580.

Also look at what happens if your income drops. Choose a payment you could still make for several months without borrowing again.

What to check before you sign

• Compare offers from banks, credit unions and online lenders. Prequalifying with a soft credit check does not affect your credit score.
• Ask about origination fees, which are taken from the loan amount and raise the true cost.
• Check for a prepayment penalty. Most lenders do not charge one, but some do.
• Credit unions often offer lower rates than banks for members with fair credit.

Ways to pay less interest

• Pick the shortest term whose monthly payment you can comfortably afford. Going from 5 years to 2 years would save $4,098 on this loan.
• Improve your credit score before you apply: pay bills on time, keep card balances low and dispute errors on your reports.
• Make extra payments when you can, as long as there is no penalty. Each extra payment cuts the balance that interest is charged on.
• Borrow only what you need: every extra $1,000 at 12% over 4 years adds about $26.33 to the monthly payment.