Loan Cost Ratio Calculator

What this calculator actually computes

The result is a simple cost ratio: the total amortising interest paid over the life of the loan, plus any upfront fees, divided by the loan principal multiplied by the term in years, expressed as a percentage. It tells you the average annual cost of the loan as a fraction of the original amount borrowed.

For a £10,000 loan at 6% over 5 years with £500 in upfront fees, the monthly payment on an amortising schedule is about £193.33. Total payments over 60 months come to £11,599.68, so total interest is £1,599.68. Adding the £500 fee gives £2,099.68 of total cost. Divided by £50,000 (£10,000 × 5 years), the ratio comes out to 4.20%.

This is not regulatory APR

Regulatory APR — the figure your lender is legally required to disclose under consumer credit regulations in most jurisdictions — is computed differently. It is the discount rate that equates the loan amount net of fees to the present value of all scheduled payments, solved iteratively. For the same £10,000 / 6% / 5-year / £500-fee loan, regulatory APR works out to approximately 8.15% on a nominal-annualised basis, or 8.47% on an effective-annual basis. Almost double the flat-rate ratio.

The gap is the time value of money. The flat-rate ratio treats every pound of interest as if it were paid at the same time, and spreads the upfront fee linearly over the term. Regulatory APR correctly recognises that money paid earlier costs more (in present value terms) than money paid later, and that an upfront fee is fully front-loaded — not amortised.

When the cost ratio is still useful

Despite the gap with regulatory APR, the cost ratio is a handy quick-comparison metric in a few cases:

• Comparing two loans of the same term and amortisation structure — the ranking is usually the same as regulatory APR
• Sanity-checking a lender's APR quote — if your computed ratio is far below the quoted APR, the lender likely has fees you missed
• Understanding what fraction of the principal you pay each year on average — useful for budgeting against income

The regulated APR figure for cross-product comparison sits on the lender's required credit agreement disclosure. Regulated lenders in most jurisdictions are required to compute and display it.

How to use this calculator

Enter the loan amount you want to borrow, the quoted annual interest rate, any upfront fees (arrangement fee, broker fee, valuation fee — anything charged at the start), and the term in years. The result is the cost ratio expressed as a percentage of the principal per year on average.

How fees change the ratio

Fees have a larger effect on the ratio for shorter loans. A £500 fee on a 5-year loan adds 500 / (10000 × 5) = 1.0 percentage points to the ratio. The same £500 fee on a 25-year loan adds only 500 / (10000 × 25) = 0.2 percentage points. This is one reason regulatory APR makes longer-term loans look proportionally more expensive than this ratio does: the regulator's IRR-based calculation correctly accounts for the fact that the fee is paid upfront regardless of term, while this flat-rate ratio dilutes it across more years.

What this tool does not capture

Several real-world costs are outside the scope of this ratio:

• Variable-rate loans — the calculation assumes the quoted rate holds for the full term
• Insurance bundles, payment protection, or other optional add-ons
• Late-payment fees, early-redemption charges, or other contingent fees
• Fees on draw-down credit, revolving credit, or interest-only structures

For a regulated loan, the lender's APR disclosure includes all mandatory charges and is the figure to use for cross-product comparison.