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Total Cost of Borrowing What does it mean? Before that question can be answered you must understand how a SIMPLE amortization schedule is calculated. Assume you borrowed $1000 for one year at 12% from a friend and agree to pay it back in 12 monthly payments of $88.85. You might think at the end of the year you would have paid your friend back the loan plus $120 is interest (.12 x 1000 = $120). You can see that an ordinary amortization schedule The 12% is called the Annual Interest Rate (AIR). Let’s assume your friend decides to charge you the $10 it cost him to acquire the amortization schedule before giving you the $1000. You tell him OK, and to just give you $990 instead of $1000. What is your new AIR now because of this fee? In essence you are making monthly payments of $88.85 based upon borrowing $1000 at 12% but now you’re only getting $990. A mathematical technique is to calculate what interest rate would satisfy the amortization formula for a $990 loan for 12 payments of $88.85? The answer is 13.92%. The new AIR is 13.92% and the corresponding EIR is 14.84%

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