How to calculate cost effectively

When borrowing money, you must repay the principal amount plus interest. Interest rates are calculated based on simple or nominal interest rates. Often, lenders also add fees to the principal. This can be loan processing fees, “points” added to the mortgage, or many other fees. Taken together, interest and fees make up your financial expenses. Cost-effectiveness or an annual percentage that uses the total financial cost to figure out the true cost of a loan is indicated as a percentage.

Cost-effective estimation formula

Accurately determining cost-effectiveness requires complex calculations. You can calculate cost-effective estimates using a fairly simple formula. First, find the total financial cost by adding all the interest charged over the duration of the loan to other fees. The formula for estimating cost efficiency is 2 (F*N) / (A* (T + 1)). F equals the total financial cost, N is the number of payments per year, A is equal to the total amount of repayment and T is the total number of payments. Let’s say you borrow \$1,000 and the total financial cost is \$250, so the amount you have to pay is \$1,250. You make monthly payments over a two-year period. You have 2 (\$250*12) divided by (\$1,250) * (24 +1). This takes into account estimated cost-effectiveness or APR of 19.2 percent.