📐 Cost of Borrowed Capital: LAS vs Alternatives
Summary: Don’t just compare headline rates. Compute the Effective Annual Rate (EAR) plus fees for LAS, personal loans, overdrafts, and margin funding to find the true cheapest source of capital. 🤓
1. Calculating EAR
EAR = (1 + r/n)n – 1, where r = nominal rate, n = compounding periods per year.1
2. LAS Cost Components
- Base rate: ~9.0% p.a.2
- Processing fee: 0.5% upfront
- Renewal fee: 0.25% quarterly
- Compounding: monthly
3. Comparing Options
| Option | Rate | Fees | Approx. EAR |
|---|---|---|---|
| LAS | 9.0% | 0.5% | ≈9.4% |
| Personal Loan | 15.0% | 1.0% | ≈16.2% |
| Overdraft | 13.0% | ₹1k/m | ≈14.1% |
| Margin Funding | 12.0% | 1.5% | ≈13.0% |
4. Sample Calculation
For ₹10 L at 9% + 0.5% fee:
- Monthly rate = 9%/12 = 0.75%
- EAR = (1 + 0.0075)12 – 1 ≈ 9.38%
- Add fee amortized = 0.5% → Total ≈ 9.88%