"Rates as low as 0.05% a day." "Just 0.6% monthly." "No fee if you repay early." Ads like these are everywhere, and every number looks cheap — until you convert it to an annualized true rate, and the real cost often doubles. Here's how annual, monthly, and daily rate conversion really works, plus a few of the most common "cheap loan" traps exposed.
The Three Rates: How to Convert Annual, Monthly, Daily
One rule of thumb carries the whole calculation: monthly rate = annual rate ÷ 12, daily rate = annual rate ÷ 360 or 365. Reversing it annualizes a monthly or daily figure:
| Conversion | Formula | Example |
|---|---|---|
| Monthly → annual | Annual = monthly × 12 | 0.5%/mo → 6% APR |
| Daily → annual | Annual = daily × 365 | 0.02%/day → 7.3% APR |
| Annual → monthly | Monthly = annual ÷ 12 | 6% APR → 0.5%/mo |
| Annual → daily | Daily = annual ÷ 365 | 7.3% APR → ≈0.02%/day |
The classic ad line "0.05% per day" works out to 0.05% × 365 = 18.25% a year — hardly "cheap." Use the percentage calculator to do these multiply-and-divide conversions in seconds and see the true annualized number.
Nominal vs Effective Rate: Where Compounding Hides
The conversions above are "simple-interest annualized." But many loans compound interest monthly, so the true annual cost is higher. That brings in the key concept — Effective Annual Rate (EAR):
EAR = (1 + monthly rate)^12 − 1
Example: a 1% monthly rate looks like 1% × 12 = 12% a year, but with monthly compounding the effective rate is (1.01)^12 − 1 ≈ 12.68%. The more periods and the higher the rate, the bigger the hidden cost of compounding. The same logic works in your favor on deposits: many banks pay interest quarterly or monthly, and if you reinvest it, your effective yield edges above the nominal rate — the direction just flips. When you borrow, never trust a surface "monthly × 12"; compute the effective annual rate for the actual compounding period. For long-horizon totals, run the compound interest calculator with the real period and see the true total cost.
Worked Example: The Real APR of an Installment Plan
The bank says "installment fee of 0.6% monthly, just 7.2% a year." This is the classic trap, and the real cost is far higher for one reason: you repay principal every month, so the outstanding balance keeps shrinking — yet the fee is charged on the full original principal the whole time.
Take a $10,000 loan over 12 months at a 0.6% monthly fee:
- Surface annualized: 0.6% × 12 = 7.2%
- True APR (IRR basis): ≈ 13% — nearly double
Another example: borrow $10,000 over 12 months at a 1.2% monthly fee. Surface annualized 14.4%, but the true APR (IRR) is roughly 26%. This is why regulators in many countries now force lenders to disclose the "annualized effective rate" — computed on the declining balance, the real cost is far above "monthly fee × 12." Enter the actual amount, term, and fees into the loan calculator to see every period's principal and fee breakdown — the total is the true price you pay.
How to Decide Before You Borrow
- Convert everything to one annualized true rate: restate daily, monthly, and fee-based pricing as a single effective annual rate so products are comparable — don't let "low daily rate" language steer you
- Watch out: "fee" ≠ "interest rate": installment fees are charged on the full principal, so the effective rate climbs as you repay; prefer products that charge on the remaining balance
- Compare total cost, not just the monthly payment: a low payment can hide a long term with far more total interest — check the total with the loan calculator before deciding
In one line: the "few tenths of a percent a day" in ads converts to 7%–18% annualized, and the true APR of a typical installment plan is about double the advertised number. Convert every loan to a true annualized rate before comparing. Open the loan calculator, enter the amount, term, and fees, see where every payment dollar goes — and sidestep the "cheap" trap.