Interest rates have changed a lot over the past several years. I remember when unsecured credit cards carried interest rates somewhere between 12% and 18% and secured loans were somewhere between 4% and 12%.
Lately, the interest rates have gone up! Now, I see credit cards with interest rates of 24% to 29% or even more. I also see secured debts with interest rates of 18% to 22% or more. This astounds me, because with secured debts, the bank already hasa backup plan. The borrower has specifically given the bank the right to take and sell his property if he does not repay the loan. This makes it much more likely that the bank will get its money back. Nevertheless, lenders charge more nowadays, and people are willing to pay.
To illustrate how much high interest rates costs us, I’ll compare the cost of a car purchased at 5%, which is about what a bank might charge its best customers, with the same car at 22%, which I frequently see for people who have a tarnished credit history. Now these are for SECURED debts, mind you – the creditor, under both instances has the right to repossess the car if the borrower doesn’t pay:
- At 5%, with a $20,000 purchase price for a car, financed over 5 years, the monthly note would be about $377.00. The total amount actually paid for the car (including interest) comes to just over $22,500. The total interest paid on this loan would be about $2,645.
- At 22%, however, the same car financed over the same 5 years would cost about $552.00 per month. The total amount actually paid for the car (including interest) at 22% comes to just over $33,000.00. Total interest paid would be just over $13,000.00, which is almost 5 times the interest that you would have paid on the 5% loan.
That’s a difference of about $10,500.00. This is enough to buy an additional quality used car with the same dollars. It’s almost like buying one car at a high interest or two cars at a low interest, all with the same dollars.