Context:
Private sector banks that announced their earnings for the October-December quarter (Q3) of 2024-25 (FY25) reported a rise in credit costs due to higher provisions, mainly for unsecured retail loans.
Credit Costs
Credit costs are the sum of the sum that a lender demands from the borrower as repayment, over and above the amount taken. They comprise interest, fees, and other charges related to a credit agreement.
What Constitutes Credit Costs?
- Interest
- The amount a lender charges for lending money. It is usually expressed as a rate related to principal and applied to the loaned sum.
- Fees
- Compulsory charges such as loan processing fees, late payment fees, or any other service-related charges that the financier may levy.
- Taxes
- Any tax charged, which could be associated with the credit contract and will be dependent on jurisdiction.
- Any tax charged, which could be associated with the credit contract and will be dependent on jurisdiction.
How to Calculate Credit Costs
- Sum total amount payable:
- Include all these components: principal or the actual borrowed amount, interest, fees, taxes, and commission.
- Subtract the loan taken:
- The amount remaining after the credit cost is calculated between the sum of total amounts payable and the principal.
- Reduce the time it takes to pay off the balance of the loan, which in turn reduces the time you will spend on interest paid. This helps reduce total credit cost.
Source: Business Standard
