Grade by Grade
F. Financial Literacy · Financial Decisions: Interest, Borrowing, Appreciation, Depreciation and Budgets

Comparing Ways Interest Is Calculated: Loans, Credit Cards and "Pay Later" Offers

F1.3 A1About 70 minutes
Learning goals
  • I can describe how interest or fees are calculated for an amortized loan, an add-on (simple interest) loan, a credit card, a payday loan and a deferred-payment plan.
  • I can calculate the total cost of a purchase for each way of paying.
  • I can turn a fee into an annual rate so that different offers can be compared.
  • I can explain which way of paying is best for a situation, and what risks to watch for.

Words to know

amortized loan
A loan where each payment covers interest on the balance that is left, so interest gets smaller as you pay the loan down (Lesson 4).
add-on interest loan
A loan where simple interest is calculated on the full original amount for the whole time, then added on and split into equal payments. It costs more than an amortized loan with the same stated rate.
grace period
On a credit card, the time between the statement and the due date. In Canada it is at least 21 days for new purchases. If you pay the full balance by the due date, you pay no interest on those purchases.
payday loan
A small, short-term loan, usually due on your next payday, with a fee for every $100 borrowed. It is one of the most expensive ways to borrow.
deferred-payment plan
An offer like "no payments for 12 months". Some plans charge all the interest back to the purchase date if the full amount is not paid on time.
buy now, pay later (BNPL)
A plan that splits a purchase into a few payments, often every two weeks. Some are interest-free if paid on time, but late fees may apply.
annualized rate
A cost written as a yearly percent so that different offers can be compared fairly.

Hook: five ways to buy one laptop

Jesse needs a $1 200 laptop for school (tax included). Jesse could:

  1. pay with savings,
  2. use a store's "0% for 12 months" plan,
  3. take a 12-month bank loan at 9%,
  4. take a 12-month "9% add-on" loan from another lender,
  5. put it on a credit card at 19.99% and pay $100 a month.

The stated rates look similar for 3 and 4. But the way interest is calculated changes the cost a lot. All rates and fees are examples.

Way 1: amortized loans (interest on what you still owe)

This is the kind of loan from Lesson 4. Each month you pay interest only on the balance that is left. A $1 200 loan at 9% for 12 months has a payment of about $104.94, for a total of 104.94 × 12 = $1 259.28: interest of $59.28.

Way 2: add-on interest (interest on the original amount)

Some lenders calculate simple interest on the whole amount for the whole time, add it on, and divide by the number of payments:

  • Interest: I = Prt = 1200 × 0.09 × 1 = $108
  • Total: 1200 + 108 = $1 308, so 12 payments of $109

That is almost twice the interest of the amortized loan, even though both say "9%". Why? With add-on interest, you keep paying interest on money you have already paid back.

Worked example

Example 1: Compare the two 9% loans

Jesse borrows $1 200 for 12 months. Loan A is amortized at 9% (payment $104.94). Loan B is a 9% add-on loan. Which costs less, and by how much?

  1. Loan A: total paid 104.94 × 12 = $1 259.28, so interest = $59.28.
  2. Loan B: I = 1200 × 0.09 × 1 = $108, total = $1 308, payment = 1308 ÷ 12 = $109.
  3. Difference: 108 − 59.28 = $48.72.

Loan A costs $48.72 less. An add-on loan with a 9% stated rate costs about the same as an amortized loan at about 16.2%.

Way 3: credit cards (daily interest and a grace period)

Credit cards in Canada usually work like this:

  • If you pay the full balance by the due date, you pay no interest on new purchases. This is the grace period (at least 21 days).
  • If you pay only part, interest is charged, usually from the purchase date. Interest is often calculated daily: daily rate = annual rate ÷ 365.
  • Cash advances usually have no grace period: interest starts right away.

For a whole-month estimate, many people use the annual rate ÷ 12, which is what we do below.

How a credit card grace period works (example dates)March 3buy a $300 jacketMarch 20statement dateApril 10payment dueat least 21 daysPay the FULL $300 by April 10→ no interest on the jacket(the grace period protects you)Pay only part of it→ interest is charged, usuallyback to the purchase date
If you pay the full balance by the due date, the grace period means the jacket costs exactly $300. If you carry a balance, interest usually goes all the way back to March 3.
Worked example

Example 2: Paying the laptop off by credit card

Jesse puts the $1 200 laptop on a card at 19.99% and pays $100 a month. Each month, interest (balance × 0.1999 ÷ 12) is added, then the payment is subtracted. How long does it take, and what is the total paid?

  1. Month 1: interest = 1200 × 0.1999 ÷ 12 ≈ $19.99. Balance = 1200 + 19.99 − 100 = $1 119.99.
  2. Month 2: interest ≈ 1119.99 × 0.1999 ÷ 12 ≈ $18.66. Balance ≈ 1119.99 + 18.66 − 100 = $1 038.65.
  3. Keep going (a spreadsheet makes this quick, Lesson 7). The balance reaches $0 in month 14, with a smaller last payment.
  4. Total paid ≈ $1 350.09, so interest ≈ $150.09.

14 months and about $1 350.09 in total: $150.09 of interest.

Way 4: payday loans (a fee per $100)

A payday loan charges a fee for every $100 borrowed, due in about two weeks. Suppose a lender charges $14 per $100 for 14 days. A fee of 14% sounds small, until you write it as an annual rate:

  • 14 days goes into a year about 365 ÷ 14 ≈ 26 times.
  • 14% × 26 ≈ 364% per year (as simple interest).

People who cannot repay often take a new loan to pay the old one, and the fees pile up. Since January 1, 2025, the most a payday lender in Ontario may charge is $14 per $100 borrowed (matching a federal limit), so this example uses the legal maximum. Rules can change, but payday loans remain one of the most expensive ways to borrow.

Worked example

Example 3: The real cost of a payday loan

Casey borrows $300 with a payday loan at $14 per $100 for 14 days. What is the fee? If Casey cannot repay and takes a new loan every two weeks for 3 months (6 times), what are the total fees?

  1. Fee: 300 ÷ 100 = 3 hundreds, and 3 × $14 = $42.
  2. Six loans in a row: 6 × $42 = $252.
  3. Casey pays $252 in fees and still owes the $300.

$42 for one loan; $252 in fees after 3 months, which is 84% of the amount borrowed.

Way 5: deferred-payment and "buy now, pay later" plans

  • "0% for 12 months" or "no payments for a year": if you pay the full amount on time, you pay no interest, which is great. But some plans charge interest at a high rate (for example, 29.99%) back to the purchase date if any balance is left at the end. Read the terms.
  • Buy now, pay later apps often split a purchase into 4 payments, two weeks apart. Many charge no interest if paid on time but charge late fees, and it is easy to lose track of several plans at once.

The lesson: a deal is only as good as your plan to pay it on time.

Total paid for a $1 200 laptop (about a year to pay)02004006008001 0001 2001 400$1 200.00Savings(no loan)$1 200.000% planpaid on time$1 259.28Amortizedloan 9%$1 308.00Add-onloan 9%$1 350.09Credit card19.99%Total paid ($)
Total paid for Jesse's laptop. Paying with savings has no interest, though Jesse loses the interest those savings would have earned (about $36 a year at 3%). The 0% plan only costs $1 200 if every payment is on time.

Compare apples to apples

To compare offers, find the total amount paid for each one over the same time, or turn every fee into an annualized rate. Then think about risk: What happens if I miss a payment?

Hands-on activity

Fine-print hunt

You need: a grown-up, and a credit card agreement, a store financing brochure or a website for a card or a "pay later" offer.

  1. Find the interest rate for purchases, the rate for cash advances, the grace period, and any fees (annual, late, over-limit).
  2. Find what happens if a payment is late.
  3. Use the numbers to calculate the cost of a $500 purchase if it is (a) paid in full by the due date, and (b) paid off at $100 a month.
  4. Write a two-sentence warning for a friend about this offer.

Model answer: purchase rate 20.99%, cash advance rate 22.99%, grace period 21 days, late fee none but rate rises after missed payments. (a) $0 interest. (b) Month 1 interest ≈ 500 × 0.2099 ÷ 12 ≈ $8.75; it takes 6 months, with about $28 of interest in total.

Just for fun

A credit card's grace period is like the five-second rule for dropped snacks, except it is real, it is at least 21 days, and it only works if you pay the whole thing.

Your turn

1

An add-on loan of $2 000 at 8% for 2 years is paid in 24 equal payments. Find the interest, the total and the payment.

2

A payday lender charges $14 per $100 for 14 days. What is the fee to borrow $500? About what annual rate is that?

3

A card balance of $600 has an annual rate of 19.99%, calculated daily. About how much interest is charged in 30 days?

4

Morgan buys a $300 jacket and pays the full $300 by the due date. How much interest is charged?

5

A buy-now-pay-later plan splits $240 into 4 payments every two weeks. What is each payment? If one is late and the late fee is $10, what is the total paid?

6

Both loans say "9%". Which costs less: amortized or add-on? Why?

7

Jesse can use the 0% for 12 months plan and is sure to pay $100 every month. Compare its cost with the credit card plan in Example 2.

More practice: warm-up

1

Find the simple interest on $1 000 at 5% for 1 year.

2

A fee is $15 per $100. What is the fee to borrow $200?

3

About what is the monthly rate for a card charging 19.99% per year?

4

What is the minimum grace period on new credit-card purchases in Canada?

5

What does deferred mean in "deferred payment"?

More practice: on your own

1

Compare the interest on $1 200 for 12 months: amortized at 9% (payment $104.94) and add-on at 9%.

2

Jesse's $1 200 card balance (19.99%) takes 31 months and $1 545.02 in total at $50 a month, but 14 months and $1 350.09 at $100 a month. Find the interest for each. What do you notice?

3

Casey takes a $300 payday loan at $14 per $100 and rolls it over every two weeks for 6 months (13 loans). What are the total fees?

4

A card charges 22.99% per year, calculated daily. Estimate the interest on a $2 000 balance for 31 days.

5

A lender charges $14 per $100 for 14 days. Show why that is about 364% per year as simple interest.

Challenge

1

The 9% add-on loan has 12 payments of $109 on $1 200. An amortized loan at 16% has a payment of about $108.88, and at 16.5% about $109.16. About what amortized rate is the add-on loan really charging?

2

Jesse's $1 200 card balance (19.99%) takes 7 months and $1 275.17 in total at $200 a month. Compare the interest at $50, $100 and $200 a month. What is the pattern?

3

A store plan: "0% for 12 months, but if any balance is left at the end, interest at 29.99% is charged on the original amount from the purchase date." Jesse pays $90 a month on $1 200. Estimate what happens (use simple interest for one year).

Check your understanding

Quiz

1.

Two loans both say "9% for 1 year" on $1 200. Which kind costs more interest?

2.

You pay your full credit-card balance by the due date. How much interest do you pay on new purchases?

3.

A payday loan costs $14 per $100 for 14 days. About what is that as an annual rate?

4.

What is the fee for a $400 payday loan at $14 per $100?

5.

A "0% for 12 months" plan is the cheapest way to pay only if…

6.

Paying more than the minimum on a credit card each month will usually…

For parents and teachers

Big idea: F1.3 asks students to compare how the way interest is calculated affects the overall cost of a purchase. Students compare amortized loans, add-on (simple interest) loans, credit cards with a grace period, payday loans (a fee per $100) and deferred or "buy now, pay later" plans. Fees and rates are examples; laws on payday loans and credit products change.

Common difficulties:

  • Trusting the stated rate. Two "9%" loans can cost very different amounts. Always compare total paid.
  • Thinking a fee per $100 is a small rate. Convert it to an annual rate.
  • Not reading the terms of deferred or "pay later" offers.

How to help: If you have a credit card, show your teen a (non-sensitive) part of a statement: the due date, minimum payment and the warning box that estimates how long it would take to pay off the balance with minimum payments. Talk about how your family avoids high-cost borrowing.