Lessons

Turning any quoted rate into a year

What it is

Lenders quote the cost in different ways. Some say a month. Some say a week. Some just name a flat extra amount. Turn every one of them into a yearly figure. The yearly figure is the only one you can compare.

Why it matters

Two per cent a month sounds small. It is about 27 per cent a year. Ten per cent a month sounds manageable. It is about 214 per cent. The small debts are usually the dearest. That is why clearing the smallest balance first feels wonderful and costs the most.

The method

Do not multiply the monthly rate by twelve. Each month charges interest on last month's interest as well. So add 1 to the monthly rate, multiply that by itself twelve times, then take 1 away. For instalments, compare the extra you repay against the amount you borrowed. This app does both sums for you.

Example

A shop hands over PKR 9,000 of goods. You repay PKR 10,000 next month. That is 11 per cent for one month, and about 250 per cent a year. Nobody calls it that.