What's the Total Cost?
July 22nd, 2022
Living in a consumer-driven society, we often buy things that appear less expensive than they really are only to find the true cost is much higher! I’m talking about buying larger items on credit, whether it’s an automobile or an appliance like a washer or refrigerator.
The seller wants you to focus on the monthly payments and will promote a low monthly amount rather than the total cost. For example, when talking with clients about their credit card debt, I ask about the interest rate. Many do not know, but for those that do, they’ll state the interest rate, for example, of 22.99%. With a balance of $2,000, you would think the answer is simple, their interest rate is 22.99%. However, the client is paying interest on top of their balance, so their real interest rate is 61% if they continued making a minimum payment of $42.50 and not add any additional charges to their credit card. For each minimum payment of $42.50 you’ll be reducing the credit card debt by a fractional amount as most of the payment is used to repay the interest being charged, and very little is going toward paying down the principal. The calculation of monthly payments will lead providers to charge a minimum payment, which is mostly an interest payment.
Now I know some will say this is not a realistic example; however, this is a common occurrence for many of my clients. Others feel that for affordability reasons, we should be using credit- that is what it is for. Simply said, do your homework, find out what you are paying over the life of the loan or what you will end up paying on your credit card purchases. Think twice before buying an item that you cannot afford to pay for in cash. Always watch out for your own interests rather than the sales rep. Take the time when financing a vehicle to see how much more you are paying for the additional year of interest and whether it is the right time to stretch your finances or better to wait.
Try out this credit card calculator to determine your total cost!