Good Interest vs. Bad Interest

Posted By: Dr. Frugal in Loans on 09/02/2007 at 17:19:42

Compound interest, when working for us, is a fantastic thing. Unfortunately, when it's working against us, it can be catastrophic. Most commercial loans charge compound interest on their notes or loans; it's how they make their money. It is to their advantage to compound interest as frequently as possible, which works for them just like it did for the deposit products that you've invested in. This makes borrowing expensive if you do not know what the terms are (well, it's going to be expensive even if you DO know what the terms are). For example, a $150k, 30 year mortgage at a pretty-good 6.5% will cost you almost $190k in INTEREST--ABOVE the $150k in principal. Yowza.

It gets worse. If you have a high-interest credit card (above 18%) and carry a large balance from month to month, you are paying an absolutely huge amount of finance charges. Credit card companies give you a minimum that must pay each month, and for many people, it's a welcome sight--everyone can afford $10. Unfortunately, the interest on credit cards is so high and the way they charge interest is so onerous that it could take you years to pay off that shrimp scampi you bought a few years ago.

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