Interest (and other stuff) Made Simple

By Barb Sieminsk i

Interest, simply put, is the cost of borrowing money When you borrow money, you pay a fee for the loan of it to spend it now rather than wait until later when you’ve saved the full same amount

Simple interest is calculated on the original amount of the loan, or the principal There are places all over town that make a business of loaning money for payday loans These places charge much higher interest fees than a bank or credit union, because they are shor t-term loans and require getting paid back quick ly, sometimes in only a week or a month. Not only that, but because they undergo little regulation, the fees can be precipitous

Compound interest is calculated on the principal and also on the accumulated interest of the previous period Another way of stating it is that it is “interest on interest ” This comes in handy with savings and deposits, par ticularly retirement savings; they ’ll accumulate faster

These concepts – simple and compound interest – are basic financial tools and if you become familiar with them you’ll make better decisions when tak ing out a loan or mak ing investments.

Aly Hess, marketing content manager of Three Rivers Credit Union, weighed in with some helpful information.

“Simply put, interest is all about time, ” said Hess “ When it comes to tak ing out a loan, the shor ter the term you choose, the less you’ll pay in interest in the long run; when it comes to investing, the longer the term the better, because you’ll gain more in interest.”

Hess cited an auto loan as an example

“If you were to take out an auto loan for $10,000 at 4 percent interest for a 60-month term, you’d pay about $257 per month and a total of $1,470 in interest over the life of the loan If you shor tened the term to 48 months, you’d end up paying about $316 per month, but only $1,173 in interest. The shor ter term saves you a few hundred dollars in interest.

“Conversely, if you were to be investing that money and opted for the longer (60-month) term, you’d receive a few ex tra hundred dollars in interest than if you invested over a shor ter term ”

Turning now to payday loans and why, as attractive as they are in commercials, they should be avoided:

“ While payday loans may seem like a convenient way to get cash fast, they have the potential to cause far more harm than good, ” said Hess. “Because they ’re able to be accessed so quick ly, fast-track ing the standard process it takes to obtain a loan elsewhere, people often don’t have an oppor tunity to thoroughly consider whether going this route is their best and only option

“Most notably, payday loans typically have an outrageous interest rate attached averaging a 400 percent APR since the terms are so shor t This can quick ly and easily result in the borrower falling into a much deeper debt than they anticipated, and even be the catalyst that throws them into the c ycle of living paycheck-to-paycheck or payday loan-to-payday loan as they attempt to pay it off ” a

Resource:

Three Rivers Federal Credit Union, For t Wayne, 260 487 3409, 3riversfcu org

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