Why pay interest to someone else?

interest is expensive

When you pay for an item using a credit card (or any other method that incurs debt) it is for convenience. You need the item today but don’t have the necessary funds. The lender agrees to pay the total amount and in return, you agree to pay them back. You also agree to pay them interest for their help. Seems fair, right?

So let’s look at an example. If you purchased a couch on a credit card for $1,000, you’d have a beautiful addition to your family room. The nice credit card people have agreed to let you pay them back with a minimum monthly payment of $20 – or 2% of the initial purchase. That seems like a great deal because you walk out with what you need, now.

But here is the catch:

By paying the minimum each month, you’ll make 80 payments of $20. That means the couch really cost you $1,600 by the time it is really yours. That means $600 would be paid in interest. If the furniture shop had asked you to pay $1,600 would you have made the purchase? Or, would you have told them $1,600 is way too much to pay for a $1,000 couch?

But how many times to you figure the cost of interest into the price you pay? Many people will drive miles out of their way to save $.10 a gallon on gas on the same day they agree to pay 60% above value in interest by using a credit card (you didn’t put your tank of gas on a credit card did you?).

Trading a ‘low monthly ┬ápayment’ for huge interest profits is a bonanza for the banks and lenders. In fact, try to purchase an automobile today and get the dealer to provide a ‘drive it off the lot’ cash price for the car. Instead they want to work overtime and find a monthly payment that fits your budget. Never mind that you’ve now committed to a 70+ month term meaning your car will be upside down (worth less than you owe) from the first mile you drive until it is five or six years old.

Shifting the interest load

Living today often means relying on credit to fund the necessities in life. Your house, your car, student loans, emergency situations, and medical bills all often cost more than the cash we have on hand. At that point, it borrowing money becomes a necessity. At the same time, that nasty interest meter starts ticking; and the cost of our purchase keeps going up, and up, and up until we pay the debt off.

But what if there was a way to borrow money but pay the interest back to ourselves? Does that sound crazy? Perhaps, but it is the way banks and other wealthy folks make and keep their riches. But the truth is, the same mechanisms exist for you, they just aren’t as well known.

And why would they?

The profit on the $1,000 couch was probably $200 to the furniture store who had to buy the couch, ship it to their store, hire someone to show it to you, pay rent on the showroom, and pay taxes on their profits. The bank who lent you the money, on the other hand, made $600 in interest on the same transaction without doing any heavy lifting.

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