Effective annual rate
The true cost of a loan over a year, including fees and compounding. The number to compare two offers with; the headline rate will not do.
In the chapter
Telling the kind that builds from the kind that sinks
From the same chapter
- Consumer debtThe kind that funds something which produces nothing and loses value besides. The most expensive and the most urgent to clear.
- Productive debtThe kind that funds something generating income or saving a bigger cost. Still debt: making sense does not make it harmless.
- Revolving creditA line you can reuse as you repay it, with a very low monthly minimum. That minimum is the trap: it stretches the debt for years.
- Minimum paymentThe least you can pay without defaulting. Paying only that is designed to make the debt last as long as possible.
- Debt avalancheAttacking the highest-rate debt first. Optimal in money terms, and therefore what the arithmetic recommends.
- Debt snowballAttacking the smallest debt first. It costs slightly more and is abandoned less often, because closing a whole debt motivates.
- RefinancingReplacing a debt with another on better terms. It only improves things if the total cost falls: stretching the term almost always raises it.