Lessons

Turning any quoted rate into a year

What it is

Lenders quote a month, a week, or a flat extra amount. All of them convert to one yearly figure, and 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 and is about 214 per cent. The small debts are usually the dearest, which is why paying off the smallest balance first feels wonderful and costs the most.

The method

Never multiply by twelve — compound. A monthly rate r becomes (1 + r) to the power of twelve, minus one. For instalments, the extra you repay against the amount borrowed, adjusted for the balance falling as you pay. This app does that arithmetic for you.

Example

A shop offers PKR 9,000 of goods, PKR 10,000 repaid next month. That is 11 per cent for a month, and about 250 per cent a year. Nobody calls it that.