Glossary · UK
What is Total Cost of Credit?
The full amount a borrower will pay over the life of a loan or credit agreement, including all interest and compulsory charges, minus the amount originally borrowed.
Full Definition
The total cost of credit is the complete amount a borrower ends up paying for the privilege of borrowing, calculated as every payment due over the full term of a loan or credit agreement -- interest plus any compulsory fees, such as arrangement fees, broker fees or account charges -- minus the original amount borrowed. It is one of the standard disclosures lenders must provide before a regulated consumer credit agreement is signed, alongside the APR, because the two figures answer slightly different questions: the APR expresses the cost as an annualised percentage rate useful for comparing products with different terms, while the total cost of credit gives the actual cash amount in pounds that borrowing will cost overall. This distinction matters most for longer-term borrowing such as mortgages and personal loans, where a lower interest rate combined with a longer term can sometimes produce a higher total cost of credit than a higher rate over a shorter term, even though the monthly payment is lower -- a trade-off that is easy to miss if only the interest rate or monthly payment is compared, but becomes obvious once the total cost of credit figures for each option are placed side by side.