How we calculate the true cost of debt
The cost of debt goes beyond the advertised rate: we add interest, fees, and insurance to show what each borrowed dollar really costs.
Use the Cost of Debt CalculatorFormula
PMT = PV × i ÷ (1 − (1 + i)^(−n))
total cost = PMT × n + fees − PV
effective annual rate = (1 + i)^12 − 1
Variables
- PV
- Amount of the debt taken out.
- i
- Monthly rate as a decimal.
- n
- Term in months.
- fees
- Fees, insurance, and taxes built into the contract.
Step-by-step calculation
- We calculate the installment using the amortization formula.
- We add up all installments and fees, then subtract the principal.
- We convert the monthly rate into a compounded effective annual rate.
Worked example
Inputs
- Debt: $15,000
- Rate: 1.8% per month
- Term: 36 months
- Fees: $400
Calculation
annual rate = 1.018^12 − 1 ≈ 23.9%
Total interest and fees well above what the monthly rate alone would suggest.
Common mistakes
- Comparing one bank's monthly rate with another bank's annual rate.
- Forgetting that early repayment reduces the interest actually paid.
Frequently asked questions
Is this the official APR?
It's an approximation of the true effective cost. The contractual APR may include other items defined by the lender.
All values are in US dollars (US$). Results are estimates and do not replace professional advice.