Two financing offers can have the same price and interest rate but very different monthly payments. The missing variable is often the loan term: the number of months over which the borrowing is repaid.
Spreading a balance over more months
A longer term gives each payment less principal to repay. That can make the monthly figure smaller, while interest continues to accrue over more months. Looking at the payment alone can hide the total cost.
A hypothetical comparison
A $25,000 loan at 6% costs about $587 per month over 48 months, with about $3,182 in total interest. Over 84 months, the payment is about $365, but interest rises to about $5,678. These rounded figures assume a fixed nominal rate, monthly payments and no fees.
There’s more outside the loan
Insurance, fuel or charging, repairs, registration and parking are separate costs. A vehicle also changes in resale value. A smaller financing payment does not show whether all these costs fit a household’s circumstances.
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What can happen when the same loan is spread over a longer term?
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