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Monthly Cost Formula:
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The monthly cost of money represents the interest expense incurred each month on borrowed funds. It calculates how much you pay monthly for the privilege of using someone else's money, based on the principal amount and annual interest rate.
The calculator uses the monthly cost formula:
Where:
Explanation: This formula converts the annual interest rate to a monthly rate by dividing by 12, then applies it to the principal amount to determine the monthly interest cost.
Details: Understanding monthly borrowing costs is essential for personal financial planning, business loan analysis, and comparing different financing options. It helps borrowers budget for interest expenses and make informed borrowing decisions.
Tips: Enter the principal amount in USD and the annual interest rate as a decimal (e.g., 0.05 for 5%). Ensure principal is greater than zero and rate is between 0 and 1.
Q1: What's the difference between monthly cost and monthly payment?
A: Monthly cost refers only to the interest portion, while monthly payment typically includes both principal and interest repayment in amortized loans.
Q2: Does this calculation include compound interest?
A: No, this is a simple interest calculation. For compound interest, the calculation would be more complex and depend on compounding frequency.
Q3: How do I convert percentage rate to decimal?
A: Divide the percentage by 100. For example, 5% becomes 0.05, 7.25% becomes 0.0725.
Q4: Is this suitable for credit card debt?
A: This provides a basic estimate, but credit cards often use daily compounding and may have different fee structures.
Q5: Can I use this for investment returns?
A: While the math is similar, this calculator is designed for borrowing costs. For investment returns, consider time value of money calculations.