Taking advantage of a 2 % discount can translate into more than a 30 % annual borrowing cost.

Question

Quizplus · Accepted Answer

When a 2% discount is offered for early payment, for example, within 10 days instead of the standard 30 days, the effective annual interest rate of not taking the discount can be much higher than it appears. This is because the opportunity cost of not taking the discount is equivalent to paying interest on the money that could have been saved. Over a year, this can compound, leading to an effective annual rate that is significantly higher than the initial 2% discount, often exceeding 30% when calculated on an annual basis.

Taking Advantage of a 2 % Discount Can Translate into More