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When clients borrow money, they incur both financial and transaction costs. Financial costs include interest, fees, forced savings, group fund and insurance fund contributions. Transaction costs include direct costs such as child care and transportation costs to attend meetings, and other indirect costs such as time away from the business, plus the opportunity cost of savings.

The objective of this lesson is to explain the effective cost to clients of borrowing and the related yield to the lender. Topics covered include:

  • Cost components
  • Effective cost calculation
  • Effective yield to an organization
  • Role of savings

This subject is covered in more detail in the separate study guide on Interest rates and self sufficiency, which also includes a financial calculator.

reviewed & published
Ledgerwood, J.
finance - lesson 2
Loan Officer, Mfi Management, Donors, Transaction Costs