A credit card charges 3% a month on unpaid balances. What is the approximate compounded annual cost?
Purpose: borrow ideally for appreciating assets (property) or to raise earning power (an education loan to upskill). Borrowing for risky investments, such as margin funding for shares, magnifies losses. Never borrow for regular expenses: that means living beyond your means and heading for a debt trap. Short-term borrowing for temporary liquidity is acceptable with a repayment plan. Cost: secured loans (mortgages) and education loans are cheaper; personal loans and credit cards are very expensive. A card is interest-free only if paid in full by the due date; carrying a balance is revolving credit.
Worked example
3% a month on a card = (1.03)¹² − 1 ≈ 42.6% a year. Informal moneylenders may charge 60–80% a year or 5% a month.