The Cost of Interest on Loans

Current thread on interest rates reminded me of something learned long ago, something that looks like few young folks realize today.

When you buy something with credit cards or loans you effectively increase the price of that purchase. Because of the convenience using Credit Cards or getting a loan most only look at the monthly payment as opposed to the total purchase price.

Example

Built my house for 50k. 10% interest rate. 30 year payments were $400/month-$4,800/year-$144,000 loan payoff.
Paid it off at $500/month-$6,000/year-$90,000 payoff. A savings of $54,000. Basically, I paid for my house twice, instead of three times.

Interest rates we so low for so long that paying off loans didn’t save a whole lot of money. But with Credit Card rates above 20% and car and home loans at 30-40 year highs, it pays you money to pay off your loans quickly.

Yes, amortization is real...It takes so long to to pay down the interest, before you even start appreciably knocking out the principle, on a extended loan!

What is really a concern other than the high rates are 5,6 ,7 and 8 year loans for automotive loans to get the monthly payments down.

Really , really adds up.

Mortgages are front end loaded though. Not the same as a credit card.

People buying things they can't afford is the concern.

this is not true, home loans for the last 50 years have a median rate of over 7%.
They are higher than the last 10-12 years or so but in that period they were abnormally low.

People got used to the low rates in the last decade and now with rates at a more normal place they forget that.

Spot on

I have a 10-year mortgage at 1.875%. I pay about $500 extra per month because I don’t like debt at my age. I know it would be smarter to invest the extra payment amount, but I don’t want to leave this world with an unpaid debt.

I have a small loaner on my wifes van but it's 1.8% so I'm not paying it off early. I am making more not paying it off early. I can build a building with the cash and not have a lone at 8%. Or keep it in cds @5%. If I leave the world before it's paid off insurance for that I put on the loan will pay it off.

I remember swallowing pretty hard when I saw my first amortization schedule on my first home 25 years ago....pretty sobering

Yes many don't realize that with a 30 year amortized mortgage and you have made payments for 15 years or half the term, you still owe nearly 2/3rds the original amount.

Bryce

But if your cash flow will allow you to do it.....you can also make additional payments to "principal only".

You just need to mark them as such and make sure your lender understands what you're intentions are

I use a card for most purchases and pay it off every month. Most months it is 2 or 3k. By chance I was looking over my statements the other day. It said if I were to make a minimum payment of about $125 it would take 17 years to pay it off. That's hard to wrap my head around.

Bought my house mid 80's the cost of a fixed mortgage was 15% for 20 years. House was $30,000. Paid it off in 7 years at that rate......jk

Exactly what I did...the world is a lot brighter without house payments...

What's hard to wrap your head around is the number of people that actually do that.

It goes both ways. You also have to consider the cost of keeping that cash tied up in an item. Maybe your better off having the item and a payment and using the cash in a way that gains more than the interest rate.

Thats what a lot of folks said just prior to the last crash/covid. Then, there were a whole lot of folks with reduced income or none at all that were thinking a paid off house isnt so bad after all. People often forget to factor risk into their 'numbers' game. Pay your house off and then use your income to build wealth fast...much less risk. Ive never seen a foreclosure on a paid off mortgage. Ive never heard anyone say, "Boy, i wish I hadnt paid my house off." Maybe a few out there..?...but never met one.
Your money, your decision and I respect that....

Did somebody say "High Interest"?
Get a Pawn Shop loan.
About 24% A MONTH

You won't find another person who hates debt more than me. Never had any and don't desire any. But it is good to realize that not using debt has a cost.

That method saves you a lot of money quickly even if you only pay $20-$50 towards additional principal a month.