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Budgeting Essentials Blog

Helping you master the practical essentials of Budgeting, Cash Flow, Accounting and Debt Relief.
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Does interest benefit you?

We are taught that interest is just an additional cost of doing business or a fee that we pay when we want to finance something we are buying.  But what is it really?  Learn more in this week’s blog.

 

Paying interest is something you accept without thinking much about it.  You are trained from an early age to accept debt and the interest that you pay as a “necessary” expense.  But when you come right down to it, what is interest?

The Merriam-Webster dictionary defines interest as “a charge for borrowed money, generally a percentage of the amount borrowed”.  Interest is what you pay to the person that is loaning you the money.  But this definition doesn’t fully explain what interest is.  It only describes interest in a way that hides the true effect of borrowing: paying more for your purchase.

The training that you get when you are learning about debt gives you the impression that going into debt and paying interest is normal, something that you will definitely do and have to pay.  That is great if you are the one collecting the interest, but not if you are the one that has to pay it!

Interest really is a price increase on what you are buying.  Even if you get a “discount” on the item, by the time you have finished making your payments, you generally have paid more for the item than you would have by paying cash.  Even zero interest loans cost you more.  The seller has inflated the price to make up for the interest they are not going to make.  You often find this kind of financing at car dealerships where the financing company is a different division of the same company.  In addition, the salesman often sells you a more expensive model because you are “saving so much money on interest”.

Think of what you pay when you finance a house.  By the time you are finished making house payments, especially on 30 year loans, you often have paid double the “purchase price” of your home.  All that interest is described as the financing fee, but it is really additional money that you have to pay for your purchase.  Is your house really worth double the asking price?  Most of us would answer emphatically, NO!

When you are getting a loan, you only look at the payment amount, you don’t consider how much more interest you are paying to get that lower payment.  The only way to lower the payment without changing the interest rate (which you know the finance company is not going to do) is to make more payments on the loan.  This means the finance company will extend the loan to make it last longer.  Then you pay interest on the loan for a longer period of time.  You pay more for the item and are in debt longer.  This can easily add 10% or more to the cost you are paying.

When you are carrying a balance on a credit card, you are increasing the cost of everything that you buy with that card.  The interest rate is usually higher than with most loans, because it is an “unsecured” loan.  That means that the lenders don’t get the title to something that you own.  They have nothing that they can take away from you if you quit making your payments.  In addition to making every purchase more expensive, this also means that you will not be able to buy as much as you could have if you saved your money and paid cash instead.  As a result, you pay more for what you are buying and you have less money to use for other things.

So from a buyers perspective, paying interest makes you pay more for what you are buying and limits your buying power.

Keep this in mind the next time you are ready to use your credit card or sign your loan papers.

Anything you tolerate becomes normal to you. When you stop tolerating debt, you increase your ability to function without it.  You can get yourself debt free. It will take you some time, but the end is worth it!- Dan Heiland

Scroll down to the comments and tell me if this post has helped you and how it did!

If you know someone this post will help, please share it with them!  If you aren’t already a subscriber, SIGN UP to receive notification emails and information on promotions we run periodically!  You can also learn more about personal debt reduction by taking my free online “Debt Relief Workshop” by clicking HERE.

God Bless your week!

 

Copyright

© 2019 Dan Heiland 2019 Kat Heil, LLC

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