Have you ever really thought about what “interest” really means? Have you ever calculated the amount of interest you pay over the life of a loan(s)? Or the amount you pay in finance charges per year on your credit card(s)?
Interest is defined as the “rent” you pay to borrow money. We have all used interest at some point and time in our lives to make purchases. Either the cash for the total purchase wasn’t available or we didn’t want to spend our cash all at one time.
The goal of many consumers is to pay as little interest as possible by either maintaining good to excellent credit and be rewarded with low interest rates OR by paying off debt early.
On the flip side of the coin, there are many consumers who have to pay higher interest as a result of mediocre to bad credit. According to bankrate.com, interest rates today are as low as 4.72% for a new automobile to as high as 19+% for a Visa Credit Card.
I once read a statement by Anthony Robbins that stated, “In any moment, a decision you make can change the course of your life forever.” If you think of this statement in reference to purchasing items on credit, how does it change your life forever? The answer – Paying continuous interest robs you of future wealth. Interest can be very costly in the present as well as the future. Let’s look at a couple of examples…
| Credit Card Balance | $10,000 |
| Interest Rate | 19% |
| Minimum Payment (2% of balance) | $200 |
| Months to payoff (paying minimum) | 100mths (8years) |
| Interest Paid over the life of the loan | $10,129 |
| Auto Loan | $25, 000 |
| Interest Rate | 7.5% |
| Term of Loan (installment) | 60 months (5 years) |
| Monthly Payment | $501.00 |
| Interest Paid over the life of the loan | $5056.91 |
| Total Interest (Credit Card & Auto) | $15, 195.91 |
The above are only two examples of situations where we pay interest. But in reality, we pay much more due to purchases of homes, additional cars, continuous credit card charges and never paying off debt.
Not to get too technical, but we can calculate the future value of the two monthly payments above: $701 per month, 20 year time frame, min 5% compounding interest = $250,000+ dollars. So, investing $701 for 20 years would yield at least $250,000. This is an example of your money working for you, instead of against you.
Do you want to now assess the damage of your particular situation? You may click here to use the “When Will You Be Debt Free” calculator at CNNMoney.com to 1) determine how much interest you will pay on your current debt OR 2) a payoff timeframe estimate if paying off debt early.
We must develop power over purchase – instead of allowing our purchases and the people from whom we make the purchases to have power over us. We must remember that we can always spend more than we make. I once met a man whose annual income in one year increased from $42,000 to $175,000. Both years he spent everything he made. He had no sales resistance, no power over purchase. – Dave Ramsey
How Can I Avoid Paying Excessive Interest?
I guess this would be the magic question. How can I avoid the “interest” trap?
- Use cash as much as possible. The envelope system is a great method for this area. When using solely cash, it’s either you have it or you don’t.
- Plan for large purchases. When planning for large purchases, shop around to compare prices versus taking the first item seen (which may be the highest price on top of paying high interest
). The budget is a great resource for planning. - Avoid spontaneous spending. Because we are inundated with so many buy now, pay later advertisements. It’s easy to talk ourselves into "just this time". But we should refer back to Tip #1.
- Pay off debt early. The debt snowball method gives positive motivation to get out of debt quickly.
- Have discipline. Last but not least, discipline is going to be what’s needed to change the buying habits that have been created over many, many years.
The ultimate challenge for any consumer is to eliminate or lower the amount of interest paid for purchases. Speaking for myself, we are still paying interest on our home, but we are working toward a quick payoff. I also will not say that I will never have to borrow money again, but I will keep the cost of borrowing down so that I have more to invest for my family. I’m all about saving money…..how about you?
| Not Interest“ed”, |
| Patrenia |
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Patrenia,
Great article with lots of good tips to help keep us on track! We don’t realize how much interest rates affect our bottom line when it comes to saving money. The interest on some of these credit cards can “eat you alive”. The amount of interest you pay over the term of a loan can be staggering! Thanks, so much, for providing a link to a calculator that will help us see for ourselves what we really are paying. It usually doesn’t seem like much but when you put pen to paper or run the numbers through a calculator, it’s an eye-popping experience!
One area I’m struggling with is my student loan. I’ve had a couple of forebearances but the interest is still going 24/7. On a couple of credit cards my interest rate was increased because I was a day or so late making my payment. Being late on a payment or over the limit will also cause some credit card companies to increase your rate. I was able to get one of those rates reduced from 19% to 12% because I called and requested that they review my payment history with them and reduce my interest rate. I emphasized that if they did not lower my rate, I would close my account and use another credit card company with better rates. And, IT WORKED!
So, keep coming with the good articles because they really get you thinking about your personal finances. We’re inundated with so much and so many things to do, until we really don’t give our personal finances much thought unless we’re in a crisis situation.
I’m looking forward to your next blog post because it’s good stuff that’s keeping me on my toes!
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