What am I even talking about?
Throughout human history, there has always been a constant that we have excelled at: Segregation. The Blacks and the Whites, Socialism vs. Fascism, the rich and the poor, boxers vs. briefs, Coke vs. Pepsi. In many of these dichotomous affairs, the main issue is usually a question of intelligence. Obviously Coke is the far superior beverage. Revolutions come about as a result of higher learning and I seek to be one of the leaders of the next revolution. It would stand to reason then, that I desire to help bring said intelligence.
Financial ignorance is at an all time high. Does anyone actually know what the recession means for us? How about why our budget is actually in the billions yet we seem to need to be taxed incessantly? Can I get a volunteer to explain why property tax is actually the legislative equivalent of the devil coming up from hell and deciding that he’d actually prefer to just live up here with us for a while? Everyone’s acting as though the very land they live on would no longer be safe to exist upon.
We’ll get to those other things in due course I’m sure but I’d like to focus on a rather large concept in a small way for this article: Interest.
Interest is the way that most banks, financial institutes and businesses that offer credit earn the majority of their revenue. Yes, when you bought that washer-dryer combo with the added refrigerator on the side because the $300 dollars a week was just too good to pass up, you perfectly activated their trap card. You see, the reason you are never told the full price of an item is because if you knew the hire purchase cost vs. the immediate price in cash, it would result in no one buying anything on hire purchase or credit – ever again.
It would be like that same Devil who is now enjoying his time on earth offering you to stay in his upstairs bedroom because he lives closer to where you work. It might be convenient in the short term, but is it really worth your soul?
Interest expense is the additional money that you pay for borrowing from the bank (or in exchange for paying for those appliances over many months). That percentage rate you have, either daily, monthly or yearly amplifies how much is owed to the bank based on the amount outstanding. This is where things get a bit dicey. Imagine the Devil offers you a ride to work each day for the month and says you’ll pay him a standard $500 with interest of 10% monthly. If you can’t pay you’ll work for him for a short while, nothing major. At the end of the month, he tells you that you “only” need to pay him $50 and you can pay the rest next month should you so desire.
Now you may be thinking: Money’s a bit tight and the offer seems really good. I’d hope you were thinking that it’s never a wise idea to make a deal with the Devil. Well, at the end of the next month he says you owe him $1,210 dollars. That’s how banks operate. They may charge an additional interest rate on amounts outstanding. He basically charged you for each time he had to pay for gas while you still had money for him. So that original $500 had interest of $50 that was effectively paid. Simple, but useless in isolation.
For the sake of the example, let’s say there was 20% interest (entirely possible) on the $500 outstanding and then the usual 10% is on your entire amount (see standard + outstanding) for the second month, that’s $1,100 for those who couldn’t be bothered. $500 a month is suddenly $1,210* after 2. All because of the very cleverly crafted “Minimum Payment.”
I guess you’ll be working for the Devil after all. Or in reality, you may be hearing from the bank about that really nice house that you vouched as collateral. Remember when you said it wouldn’t come to that?
* For those that were interested in the math of that $1,210. I broke it down below:
Principle: $500 per month.
Interest Rate: 10%
Interest Rate on Outstanding: 20%
After one month, you owe $550, if you pay the $50 minimum payment, then you owe $500 still.
This $500 is taxed at 20% for an additional $100 interest. This interest is then added to the principle of $500 and combined with the new month’s base principle. So you now have (Month 1 $500 + $100 interest + Month 2 $500).
It gives you a total of $1,100 which is now charged at the base rate of 10% for month two’s interest figure of $110. Add that to the amount from before and you now have your current total: $1,210. I don’t expect everyone to agree or understand but as long as you grasp the danger of a minimum payment, then I’ve done some good.