The Real Cost of Borrowing Money

 

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"Once, when my mother mentioned an amount and I realized I didn't understand, she had to explain, 'that's like three Mercedes.' Then I understood." — Brooke Shields

The final cost of borrowing money often involves much more than just the interest rate. A variety of other monetary and nonmonetary costs should be considered in determining the real cost of borrowing. For example, a loan that requires you to maintain certain financial ratios may be unrealistic for your particular business. Your checklist for reviewing the costs of a bank loan should include:

• direct financial costs, such as interest rates, points, penalties, and required account balances
• indirect costs and loan conditions, such as periodic financial reporting, maintenance of certain financial covenants, and subordination agreements
• personal guarantees needed to obtain the loan