Calculate Cost of Debt
Including Opportunity Costs

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Help you to see what you are really giving up when you spend an amount of hard-earned income on interest charges.

This free online Debt Calculator will calculate cost of debt in terms of the interest you could be earning on the interest charges you are paying. As you will soon see, the interest charges you are paying on your debts is only the tip of the "cost of debt" iceberg.

Opportunity Costs

If you're not familiar with the term "opportunity cost," then shame on our public educational system. Why? Because an acute understanding and awareness of that term is critical to the amount of financial happiness you will experience in your lifetime.

If you don't know what they are, Opportunity costs are the values of what you give up by choosing one course of action over all other alternative actions, and can be tangible, intangible, or both. Let's first discuss the tangible opportunity cost of debt.

Tangible Opportunity Costs of Buying on Credit

First of all, if you decide to spend a given amount of money on a non-appreciating good or service, you are simultaneously giving up the right to spend that specific allotment of money on anything else that money could have purchased. For example, you could have used that money to take time off from work, to purchase something else of equal or lesser value, to purchase an investment, and so on.

In the case of choosing to spend the money rather than invest it, the tangible opportunity cost would be equal to the amount of interest you could have earned on that money if you invested it for a designated period of time (less than or equal to the remainder of your life, or that of your heirs). In the case of large-ticket purchases, the opportunity cost of lost interest earnings can be staggering!

Now, if turns out you don't have the cash to purchase a product or service you desire, then of course you can choose to buy the product or service on credit. If that's the case, then not only are you giving up the right to earn interest on the money used to purchase the product or service, but you are also giving up the right to earn interest on the interest charges you will now be forced to pay rather than invest. Now, did your lending institution ever bring that fact to your attention? Of course not.

Intangible Opportunity Costs of Buying on Credit

In the course of borrowing money for non-essential, non-appreciating products and services, other opportunity costs arise that cannot be quantified -- and therefore cannot be used to calculate cost of debt. Here are a few of the most common intangible opportunity costs of buying on credit.

Inefficient Decision Making: Having easy access to credit gives you the false impression that you can have it all. As a result you're not likely to take the time to determine which basket of products and services will bring you the greatest emotional returns. If you were forced to pay cash for everything you purchase you would instantly begin getting higher emotional returns from the same amount of money being spent.

Deficient Problem Solving: Since it's much quicker and easier to solve a problem by throwing borrowed money at it, having easy access to credit tends to thwart our natural problem solving abilities. If you were forced to pay cash for everything you purchased you would be totally amazed at the number of problems you could solve with little no expenditure of money (decreased opportunity costs).

Crystal Ball Predictions: When you buy on credit you are basing your decision on how much money you are earning now, and on how much you enjoy your present work. However, because you cannot know what the future holds, for all you know you might be repaying the debt on half the income you are making now after being forced to work at a job you hate. If you knew now that halfway through your debt repayment you would lose your job and would be forced to dig trenches by hand in 110-degree heat -- for half what you are earning now -- would you still decide to create this debt?

With that, let's use the debt calculator to calculate cost of debt in terms of how much interest you could be earning on the interest charges you are paying.

Calculate Cost of Debt
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Instructions: Enter the debt's current balance owed, annual interest rate, and the monthly payment amount.

Next, choose whether the monthly payment is "Fixed," or a "Declining" monthly minimum payment.

Finally, enter the percentage return you would expect to earn on your investments, then click the "Calculate Cost of Debt" button.

Mouse over the blue question marks for a further explanation of each entry field. More in-depth explanations can be found in the glossary of terms located beneath the Cost of Debt Calculator.

Help Current balance owed ($):
Help Annual interest rate (%):
Help Current monthly minimum payment amount ($):
Help Fixed or declining minimum payments?:
Help Return on investments (%):
Help Months to pay off debt:
Help Total interest cost:
Help Foregone interest earnings:
Help Difference between borrowing and saving:

Calculate Cost of Debt Glossary of Terms

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Current balance owed: The amount you still owe on the debt. Due to compounding interest, the amount you owe cannot be arrived at by simply multiplying your payment amount by the number of payments remaining. You may need to call your lender to find out the exact amount you owe.

Annual interest rate: The annual interest rate you are being charged for the debt. The actual dollar amount you are being charged also depends on your current balance and on how often your lender compounds the interest charges (most credit card companies compound interest on a daily basis, i.e., annual rate ÷ 365 X average daily balance).

Current monthly minimum payment amount: The amount of your current monthly payment.

Fixed or declining minimum payments: Choose whether your monthly payment is a Fixed amount, or a Declining minimum payment amount. If you are making declining minimum payments, in order to calculate cost of debt, the calculator will determine what percentage your current minimum payment is of the balance, and then use that percentage to determine your remaining payment amounts (or $15, whichever is greater). NOTE: Try calculating both payment methods to see how much more interest you will pay (and lose interest earnings on) if you continue making only the minimum payment amount instead of "fixing" the current payment amount.

Return on investments (ROI): The rate of return you expect to earn on your investments. To calculate cost of debt, the calculator will use this rate to determine how much interest you could be earning on the interest charges you are paying.

Months to pay off debt: Based on your entries, this is the number of payments (months) you will need to make in order to pay off this debt.

Total interest cost: Based on your entries, this is the total interest charges you will pay between now and when you pay off this debt.

Foregone interest earnings: If you would have paid cash for what this debt was used to purchase, and instead chose to invest the avoided interest charges, this is what your investment would be worth for the same time period you would have been making payments on your debt.

Difference between borrowing and saving: This is the difference between what you will pay in interest charges on this debt and what you could have earned with the interest savings if you had not created this debt in the first place.

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