Understanding Interest on Debt

Mounting credit card debt, medical bills and other loan obligations can cripple you financially and can have a significant effect on your debt obligations.  Credit card companies and banks are in the business of making money do so in large part by ending money to purchase goods or services and allowing you 30 days to pay off the charge.  If you cannot pay the balance in full within thirty days, you are charged interest on the outstanding balance.  Because interest rates may be higher than 20% per year if you have poor credit or have missed a payment or two, interest charges can significantly increase how much you ultimately pay for the goods and services you buy on credit.  Consider the following example:

John has a $5,000 balance on a credit card with an annual interest rate of 15% and can only afford to pay the required monthly minimum payments.  At 15% interest, John’s minimum payment at the end of the first month is $112.50 (assuming the minimum payment is calculated as interest plus 1% of the balance owed).  John’s initial interest obligation is be $62.50 ($5,000 x 15% / 12 months a year = $62.50 per month in interest).  When John’s interest payment is subtracted from the minimum monthly payment of $112.50, only $50 is left to pay down the principal balance of $5,000.  This means that if John stops making charges on the credit card and continues to only make his minimum monthly payments, it will take him 266 months or 22.16 years to pay off the debt and, in the end, he will have paid $5,729.21 in interest over and above his initial $5,000 purchase.

On the other hand, if John is able to pay $200 per month toward the debt, he will pay it off in 31 months and will only pay $1,032.66 in interest over the life of the loan.

As you can see, interest charges play a huge role in mounting debt and must be taken into consideration when developing a plan to deal with your financial issues.  Being
proactive is the key to resolving almost any financial crisis and at Matthew C. Bothwell, P.A., we are here to help.  We are here to help you address your financial issues before they become problems and are never farther away from you than your telephone.  Contact us today to learn more.