When you are looking for a loan, you need to compare loans by working out the total cost of repaying the loan. Although many web sites allow you to compare the APR costs, working out the real total cost of a loan is a little more complicated. However, it is important that you do this so that you can budget accurately and also so that you can find the best deal for your needs.

Estimating the total cost

The quickest and easiest way to estimate the total cost is to multiply the total amount borrowed by the APR, and then multiply this by the number of years. For example, if you borrow '10,000 and the APR is 10% for 5 years, then 10000 times 0.10 times 5 equals '5000. This is the interest you will pay, so add this to the total amount borrowed and then you know to borrow '10,000 for 5 years at 10% costs you '15,000 in total. Of course, this is only an estimate and will be higher than the actual amount as interest payments are reduced as you pay off the amount.

Other costs

There are obviously other costs to add to this total amount, such as loan processing fees, payment protection insurance and any other fees you need to buy to set up the loan. Add these to the total cost mentioned before and you have the total that you need to pay back over the loan term.

TAR

If you are discussing the total cost of the loan with your lender, then ask them to give you the TAR. This stands for Total Amount Repayable, and will let you know the total you have to pay back during the loan term. The difference between the amount borrowed and the TAR will tell you how much the loan is costing. A smaller difference between these two numbers means a better deal for you.

APR

As well as knowing the TAR, you should work out how much you need to repay each month. To do this, divide the TAR by the total loan term in months. For example, if you were paying back '14,400 over 12 years, then you will pay back about '100 a month (14,400 divided by 144 months). Of course, this is also an estimate as the TAR amount you have calculated is an estimate. To get the exact amount, ask the lender.

Adding penalty costs

When working out the total cost of a loan, you should budget into the equation some penalty fees. Although you might never pay any of these fees, to allow for a few late payments will help you to be prepared in case. It may also help you to decide between two similar loans, depending on the amount they charge for penalties and late fees.

If you are unsure, seek advice

If you are looking for a loan and are still unsure how much you will need to pay back over the whole term, then consult an independent financial advisor, who can help you work out how much you are paying for each loan, and which is the best deal.