(W5:D2) WHAT IS INTEREST? WHY DO WE PAY SO MUCH?
Interest is the amount of money you pay based on a percentage of what you borrowed. This is typically expressed by Annual Percentage Rate (APR) or the annual amount of the loan you pay as an added fee to what you borrowed.
Let me explain this differently. You borrow $1,000, you have to pay back a $1,000 (principle) plus an added fee, a percentage of the $1,000 (interest). Say you rack up $1,000 on a credit card, the interest...
(W5:D2) WHAT IS INTEREST? WHY DO WE PAY SO MUCH?
Interest is the amount of money you pay based on a percentage of what you borrowed. This is typically expressed by Annual Percentage Rate (APR) or the annual amount of the loan you pay as an added fee to what you borrowed.
Let me explain this differently. You borrow $1,000, you have to pay back a $1,000 (principle) plus an added fee, a percentage of the $1,000 (interest). Say you rack up $1,000 on a credit card, the interest rate for your card is 20%, that means that annually, you pay an extra $200 extra to paying back your loan. That is $200 that could have gone somewhere else, or been money in your pocket, but you wanted something or things very badly to borrow for them and you have to pay them back (principle) plus a continuous fee (interest). Principle is the other part of the repayment and basically means an amount you pay back of the actual loan each time you make a payment.
Why is interest so bad to your financial survival? Think of it this way.
- The average American owes $6,993 in credit card debt. The average credit card interest rate of repayment is 20% (now 24.8%). Annually, that is an extra $1,238 that goes to that credit card. That’s over $100 a month you could be spending on food, housing, or other necessities. That could also go to so many other things, if you could hold on to it. But it’s even worse. That is just your credit card fees.
- What about all your student loans? The average American also has $$37,850 worth of student loan debt at an average of 6.87%. That is an extra $3,273 you could be spending or almost $300 a month you could be spending on other things that you really want.
- Now how about any additional personal loans you took for purchases (excluding mortgages). The average American has $1,370 in home equity loans, $4,760 in car loans, and $1,520 in other loans. In total that is $11,989 (was $7,650 in 2022), and these interest rates hover around 71%. Annually, you are paying an extra $765 a month that could be going to other things.(21)
- Now, what about the mortgage on your house? The average American, with a mortgage, owes $244,498 (was $172,561 in 2022) and pays about 7% interest more on that debt annually. That’s $6,902.44 in interest, not counting the principle amount you have to pay back.
- In total, the average American has $104,215 (was $92,727 in 2020 – 11% increase) then you pay between $7,295.05-$20,843 annually or translated per month, that’s $607.92-$1,736.92 every month you pay for nothing. Now, that is for the average American. For those who have a mortgage, their average total debt is $241,815, translating to about $$24,181.50 annually or $2,015.13. That is an additional fee you pay just because you wanted to buy things on debt.
- If you didn’t have a mortgage, it’s not much better. The total, average American without a mortgage is $23,000 in debt at 24.8%. So they pay and pays $5,704 towards interest annually. Per month that comes to $475.33 of extra money you may be paying for money you borrowed to buy something before you had the money to buy it. That is a lot of money when you think of how long it will take you to pay be the principle amount and pay off the entire debt.
The truth is that you can spend the money now on debt and pay it back with interest for a very long time, you can work hard beforehand and make that money for the things you want, or you can be patient and wait until you gather the money, working with normal effort, to pay for these purchases instead of putting them on a credit card or making a loan. In an adult lifetime, before retirement, of 30 years, the average American will pay nearly $300,000 to the credit card companies and banks before retirement on the debt that they have. Now tell me that isn’t bondage. You can buy a very nice house in most parts of the United States for that amount of money, free and clear, without any debt.
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