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Real cost of debt

This one will be very helpful for readers who know just three things: how much they are borrowing, the amount of their repayments, and the number of those repayments.

It will be very useful indeed for anyone contemplating taking out a personal loan, a car loan, or even a payday loan.

With just these three items, you can work out the effective cost of credit of the debt obligation, expressed as a % per annum.

Notice it works out the cost of credit, not the interest rate specifically. And there-in lies a trick-of-the-trade.

'Interest' is the price of money over time. But the cost of credit may also include a whole range of pesky fees and charges.

Most lenders charge those extras. They are allowed to under law provided they are transparent about the charges, they are available for you to review before you commit to the credit contract, and they are 'reasonable' (that is, they just recover the cost of a service provided).

Effective Interest Rate Calculator

Borrowed amount
Installment amount
Installment frequency
Number of installments
The effective cost of debt is
on a per annum basis.

But these fees are often added to the amount borrowed up front, on to which interest is applied, and become part of the repayment obligation.

Such fees may look relatively minor and perfunctory, but they are vital to the lender, helping them build and fatten margins. (Lenders have other ways to do this around default fees, and keeping arrangements very tight so that 'default' is more likely to apply. But that is another story.)

To use this calculator you should enter the value of the net funds you receive from the lender as the "Borrowed Amount" rather that the amount you may read in the debt contract.

Enter your repayment obligation amount in the "Installment amount" box. And the number of installments is self explanatory. (Yes, in some contracts, either the first or last payment installment may be slightly different. This calculator doesn't allow for that, so just enter the usual installment amount.)

The result is expressed as a an effective rate of interest, on a per annum basis. It could well be different to the interest rate specified in your debt contract. In fact, it is likely to be quite a lot higher. To be frank, the result of this calculator is a much more accurate reflection of the rate you are actually paying than your contract rate. Your contract rate will be legally correct, but the calculator rate is the real, full, effective cost of credit.