We launch a new calculator that figures out the true "cost of credit" of a loan contract, simple to use but revealing (and sometimes disturbing)

Interest is a powerful force.

Fortunes have been built 'earning' it.

Penury has resulted paying it.

Albert Einstein has even been attributed with the best quotes about interest (although it is doubtful he actually said any of these):

Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.

Compound interest is the most powerful force in the universe.

Compound interest is the greatest mathematical discovery of all time.

But it is certainly correct that working out an effective interest rate per annum is not easy. Heck, we don't find it easy and it is our business!

So we have developed a set of calculators. You can find them all here.

And today we are adding a new one.

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.

Effective Cost of Debt Calculator
Borrowed Amount
Installment Amount
Installment Frequency
Number of Installments
The effective cost of debt for the loan is

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 under the 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).

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 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 this debt.

If you have a mortgage, you can use this calculator to check your current interest rate. But that will work only if you have a table mortgage, and the number of installments are the number that will pay the loan off in full at the end of the installment number you enter. This tool won't work for any case where there will be a balloon payment required at the end, or where payments vary each period.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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The Most IMPORTANT Video You'll Ever See (part 1 of 8)

5 million views for an old codger giving a lecture about arithmetic?? What's going on? You'll just have to watch to see what's so damn amazing about what he (Albert Bartlett) has to say.

I introduce this video to my students as "Perhaps the most boring video you'll ever see, and definitely the most important." But then again, after watching it most said that if you followed along with what the presenter (a professor emeritus of Physics at Univ of Colorado-Boulder) is saying, it's quite easy to pay attention, because it is so damn compelling.


Entire playlist for the lecture: http://www.youtube.com/view_play_list...

I agree. It is worth a watch. Bartlett is a cult figure now and many commenters on this site have pointed to his video over the years. I think Murray Grimwood (Powerdown Kiwi) was the first in 2011. Thanks for the reprise.

Very disturbing in part, in fact. A great part of society today does not seem to understand the difference between money earned and money borrowed, when it gets down to spending. Often wonder within the great debate about poverty traps, the homeless etc, in what percentage of that indebtedness might have played a part. And in turn does the relatively easy access to credit these days encourage that. Information such as this article should be compulsory somewhere in curriculum of every school child. Can remember, way back in my time, there were lessons “home economics” but that was cooking & domestics I believe. Perhaps bring that back with the accent now on budgeting, saving, investing etc.