Total Loan Cost

Meaning and Definition

The total loan cost refers to the overall amount a borrower will repay over the duration of a loan, including both the principal amount borrowed and any associated fees, charges, and interest. It represents the total amount of money required to fully settle the loan. The total loan cost provides a comprehensive view of the financial commitment involved in borrowing.

Why it is important to know

Understanding the total loan cost is crucial for borrowers as it helps them assess the affordability and feasibility of taking out a loan. By considering the total loan cost, borrowers can evaluate the financial impact of borrowing and make informed decisions regarding their ability to meet repayment obligations. It allows borrowers to compare different loan options and choose the most suitable one based on their financial circumstances.

Example in car finance

Suppose a borrower takes out a car finance loan with a principal amount of £15,000, an interest rate of 7% per annum, and additional fees and charges totaling £1,000. The loan has a term length of four years. The total loan cost would be calculated by adding the principal amount, the total interest charges over the term, and the additional fees. In this case, the total loan cost would be £20,800 (£15,000 + £5,200). This represents the total amount the borrower would need to repay to settle the loan completely.