Advice from Intellichoice: Financing Overview

It is now time for us to repeat our brief accounting lesson. When we talk about finance costs, it's important to distinguish between what is actually a cost and what is not. Let’s say you bought a new car for $19,000. You no longer have the money, but you do have a car of equal value - an asset. From an accounting standpoint your cost at that point is actually a net zero.

If a bank loaned you $19,000 to buy the car you owe the bank that money, but it still hasn’t cost you anything yet. However, when you borrow money from any lending institution, not only will the lender ask you to pay back the money they loaned you, they will also charge you interest. The money that they originally loan you is not a cost - only the interest charge is. End of lesson.