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Cost Of Borrowing Formula:
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The Cost Of Borrowing formula calculates the total interest cost for a loan or credit product. It's a fundamental calculation used in Canadian financial planning to understand the true cost of borrowing money.
The calculator uses the simple interest formula:
Where:
Explanation: This formula calculates the total interest cost over the life of the loan based on the principal amount, annual interest rate, and time period.
Details: Understanding borrowing costs is crucial for making informed financial decisions, comparing loan offers, and budgeting for debt repayment in the Canadian financial context.
Tips: Enter APR as a decimal (e.g., 0.05 for 5%), principal amount in CAD, and time in years. All values must be positive numbers.
Q1: What's the difference between APR and interest rate?
A: APR includes both the interest rate and any additional fees or costs associated with the loan, providing a more comprehensive view of borrowing costs.
Q2: Is this calculation accurate for compound interest?
A: No, this formula calculates simple interest. For compound interest, a different formula accounting for compounding periods is needed.
Q3: How does Canadian law regulate borrowing costs?
A: Canadian regulations require lenders to disclose all borrowing costs clearly, including APR and total cost of borrowing, to ensure transparency for consumers.
Q4: Are there additional costs not included in this calculation?
A: Yes, this calculation only includes interest costs. Additional fees like origination fees, insurance, or penalty charges may apply to actual loans.
Q5: How can I reduce my borrowing costs in Canada?
A: Strategies include improving credit score, shopping around for better rates, making larger down payments, and choosing shorter loan terms.