Most loans use the same arithmetic, the instalment formula from How Loan Amortization Works. What differs is the security, the interest rules and the fees. This guide covers the differences that change what you actually pay, with each number computed by the matching calculator.
The loan types at a glance
| Loan | What it is | Key thing to watch |
|---|---|---|
| Auto loan | A fixed-payment loan secured by the vehicle | Term length: long terms lower the payment but raise total interest and risk owing more than the car is worth |
| Personal loan | Unsecured instalment loan for any purpose | Origination fees and APR rather than the headline rate |
| Student loan | Education loan, often with a grace period and income-based repayment options | Interest that accrues while you study |
| Business loan | Term loan or line of credit for a company | Factor rates, which hide a much higher APR (see below) |
| Boat loan | A secured loan like an auto loan, usually with longer terms | Insurance, storage and the speed at which boats lose value |
| Mortgage | A long loan secured by property | Rate type, term, points and closing costs |
| HELOC | A revolving credit line secured by home equity | Variable rate, and the payment jump when the draw period ends |
| Reverse mortgage | Lets older homeowners borrow against equity with no monthly payment | The balance grows and is repaid when the home is sold or the borrower leaves |
| Car lease | Pay for the depreciation plus a finance charge, then return the car | Mileage limits, fees and the residual value |
Two questions sort almost any loan. Secured or unsecured? A secured loan lets the lender take the asset if you default, so it usually costs less. Fixed or variable rate? A fixed rate keeps the payment constant; a variable rate follows an index and can rise.
Calculators for the common ones: Auto Loan Calculator, Personal Loan Calculator, Student Loan Calculator, Business Loan Calculator and Boat Loan Calculator.
Mortgages
- Canada compounds fixed-rate mortgage interest semi-annually. On $400,000 at 5% over 25 years, that gives a payment of $2,326.42, against $2,338.36 under the monthly compounding common in the US. Terms (often 5 years) are renewed inside the longer amortization, so after 5 years the balance is still $354,030.03. Try the Canadian Mortgage Calculator.
- The UK distinguishes repayment mortgages from interest-only ones and adds stamp duty on purchase; use the UK Mortgage Calculator.
- FHA and VA loans in the US are government-backed. FHA loans accept smaller down payments in exchange for mortgage insurance; VA loans are for eligible service members and veterans and often need no down payment but charge a funding fee. Eligibility and limits change, so check current rules, then use the FHA Loan Calculator and VA Mortgage Calculator.
- Points are fees paid up front to lower the rate: one point costs 1% of the loan. On a $300,000 loan, one point ($3,000) that cuts the rate from 6.5% to 6.25% lowers the payment by $49.05 a month, so it pays for itself after about 61 months. It is worth it only if you keep the loan longer than that. See the Mortgage Points Calculator.
- A HELOC is a credit line secured by your home. On $50,000 at 8% with a 10-year draw period, the interest-only payment is $333.33; in the following 15-year repayment period the payment rises to $477.83. Try the HELOC Calculator.
- A reverse mortgage gives homeowners aged 62 and over (in the US) access to equity without monthly payments, while the balance grows. Use the Reverse Mortgage Calculator and read the terms carefully.
Buying versus renting, and rental property
Whether to buy depends on how long you will stay, the price growth, the interest rate and the cost of owning. Weigh them in the Rent vs. Buy Calculator. For an investment property, two quick measures are the cap rate (net operating income divided by price) and cash-on-cash return (yearly cash flow divided by cash invested). An $250,000 property with $16,000 of net operating income has a cap rate of 6.4%; the Rental Property Calculator works out both measures.
Leasing versus buying a car
A lease payment is depreciation plus a finance charge: (cap cost − residual) / term + (cap cost + residual) × money factor. For a $30,000 car with an $18,000 residual over 36 months at a money factor of 0.0025 that is $333.33 + $120 = $453.33 a month. The money factor times 2,400 is the approximate APR, so 0.0025 is 6%. Compare in the Auto Lease Calculator.
Cash back or low interest
Dealers often offer a choice between cash back and a low rate. Taking $3,000 cash back and borrowing $27,000 at 6% over 60 months costs $521.99 a month, or $31,319 in all, while 0% financing on the full $30,000 costs $500 a month, $30,000 in all, so the 0% deal wins by about $1,319. Run your own case in the Cash Back vs. Low Interest Calculator.
Watch the factor rate
Some business lenders quote a factor rate instead of an APR. A factor of 1.2 on $10,000 means you repay $12,000. If that is repaid in 6 equal monthly payments, the true annual rate is about 66%, because you hold the money for only a few months. Always convert quotes to APR before comparing, as in the Business Loan Calculator.
Common mistakes
- Comparing the rate instead of the APR. Fees belong in the comparison; see APR.
- Choosing a longer term only to lower the payment. Total interest rises.
- Forgetting the payment change. HELOCs, adjustable mortgages and expiring promotional rates all reset.
- Treating this as advice. Terms and eligibility change by country and lender.