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Compare financial options using rates, fees, and total cost

Comparing financial choices involves calculating the dollar effect of percentage rates and fixed or recurring fees over the same stated period, then combining these amounts with the principal or purchase price to determine total cost. Tables, equations, percentages, and unit rates reveal why the option with the lowest advertised rate may not be cheapest; complex APR regulations, variable rates, and advanced compound-interest models are not included.

Detailed Explanation: Compare financial options using rates, fees, and total cost

When comparing financial options, put every cost over the same time period. Then add the percentage cost and any fixed fees to the original amount.

Example

You need to borrow $1,000 for one year.

  • Option A: 5% interest and a $50 fee
  • Option B: 7% interest and no fee

Which option costs less?

Step 1: Calculate the interest for each option

Use:

Interest=Principal×Rate\text{Interest}=\text{Principal}\times\text{Rate}

The principal is the amount borrowed: $1,000.

For Option A:

$1,000×0.05=$50\$1{,}000\times 0.05=\$50

For Option B:

$1,000×0.07=$70\$1{,}000\times 0.07=\$70

Step 2: Add the fees

Option A has a $50 fee:

$50+$50=$100\$50+\$50=\$100

So, the total cost of borrowing with Option A is $100.

Option B has no fee:

$70+$0=$70\$70+\$0=\$70

So, the total cost of borrowing with Option B is $70.

\vert Option \vert Interest \vert Fee \vert Total extra cost \vert \vert --- \vert ---: \vert ---: \vert ---: \vert \vert A \vert 50∣50 \vert 50 \vert 100∣∣B∣100 \vert \vert B \vert 70 \vert 0∣0 \vert 70 \vert

Step 3: Find the total amount paid back

Add the principal to the total extra cost:

Total repayment=Principal+Interest+Fees\text{Total repayment}=\text{Principal}+\text{Interest}+\text{Fees}

Option A:

$1,000+$50+$50=$1,100\$1{,}000+\$50+\$50=\$1{,}100

Option B:

$1,000+$70+$0=$1,070\$1{,}000+\$70+\$0=\$1{,}070

Conclusion

Option B is cheaper. You would pay back 1,070insteadof1,070 instead of 1,100, saving:

$1,100−$1,070=$30\$1{,}100-\$1{,}070=\$30

Even though Option B has the higher advertised rate, it has no fee, so its total cost is lower. Always compare the interest and fees together over the same time period.

Learn by doing: Compare financial options using rates, fees, and total cost

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    Financial Literacy - Interest and Fees - Simple - Comparison With Fees to Better Option

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