Credit, Interest and Borrowing Costs

Principal, rate and term

Principal is the amount borrowed. Interest is the cost charged for the use of that money. The rate and the time the balance remains outstanding are major drivers of total cost. A longer term can reduce the scheduled monthly payment while increasing the number of periods in which interest is charged.

For amortising loans, each payment is divided between interest and principal according to the loan structure. Early in many schedules, a larger share can go to interest because the outstanding balance is higher.

APR and total cost

APR is intended to make borrowing costs more comparable on an annual basis, but calculation rules vary by jurisdiction and product. It should not be the only number reviewed. Fees, promotional periods, variable-rate terms, early-repayment rules and the total amount repayable can materially change the economics.

A lower monthly payment is not automatically a cheaper loan. It may simply spread the same or larger balance across a longer term. Compare total cost over the period you expect to keep the debt.

Credit cards and minimum payments

Revolving credit can be expensive because interest continues while a balance remains outstanding. Minimum payments may keep the account current but can reduce principal slowly when the interest rate is high. Paying more than the minimum, when affordable, can shorten payoff time and reduce interest.

Promotional rates should be tracked carefully because the cost can change when the offer ends. New spending can also be treated differently from transferred balances.

Refinancing

Refinancing can be useful if it reduces the effective cost or improves cash flow without creating larger long-term problems. Compare the new rate, fees, term, secured versus unsecured status, penalties and total projected cost.