What a payment plan actually costs.

What the two rates mean

The first figure is the nominal annual rate, which is the periodic rate multiplied by the number of payments in a year. It is the number a lender is generally required to quote, and it is the one to compare between offers.

The second counts the compounding, which is what you would actually pay over a year if the arrangement kept running. It is always the larger of the two, and the gap widens as the payments get more frequent.

A short plan with a small flat fee can produce an enormous annual rate that is arithmetically correct and still a poor guide to anything. Six dollars is six dollars. That is why the dollar figure is the large one here and the rate sits underneath it.

Why the cheaper plan can have the higher rate

A rate is a price per unit of time. Dollars are what leaves the account. Borrow five hundred over six months at twenty percent and you pay less than borrowing the same five hundred over two years at eighteen, because you have the money for a quarter as long. Neither number is the honest one on its own.

So the comparison names both, and when they point in opposite directions it says so rather than leaving you to notice. The rate answers whether the credit is well priced. The dollars answer what it costs you. Those are different questions, and a seller will quote whichever one flatters the offer.

Reading the schedule

Interest is charged on what is still owed, so it is largest at the start when the balance is largest. On a two year plan the first payment can be a third interest and the last one almost none. Nothing is being hidden by that. It is simply what a falling balance does, and it explains why leaving a plan early feels like it should save more than it does.

The interest column adds to the finance charge exactly and the balance ends at zero, both to the cent. The last row is settled backwards to make that true: its share of the balance is whatever is left, and its interest is the rest of the payment. Any rounding from the rows above lands there, usually a cent or two, which is how a lender's own schedule handles it.

What this assumes

• Payments are equal and evenly spaced, which is what an instalment plan almost always is.
• Fees are spread across the schedule, which is how a regulator would treat a charge you cannot avoid. In the schedule the fee is split into whole cents across the payments, so the payment column adds up with nothing left over.
• Nothing is paid late unless you say so in the late fee panel, and that panel is a scenario you set rather than a prediction anyone is making.
• A late fee is spread across the schedule like any other charge. A fee levied in the second month is worth more to the lender than the same fee in the twentieth, so the real rate under late payments is a little higher than the figure shown.
• The early payoff figure with a rebate is the balance genuinely still outstanding, which is what a simple interest agreement asks for. If a fee was charged up front rather than earned over the term, you do not get it back, and the saving here is that much optimistic.
• The early payoff figure with no rebate is every remaining payment in full, so the saving is nothing. Look in the agreement for the word rebate, or a refund of unearned interest, or a line saying the finance charge is earned in full at signing.
• A reference rate is applied to the same amount over the same number of payments, so it is like for like. It leaves out anything a card adds on top, such as an annual fee or a cash advance charge, and it assumes you would actually clear it on that schedule rather than carry the balance.
• If the payments add up to the price or less, the rate is zero and it says so, rather than finding something to worry about.