Interest Rates can be a Blessing/Curse
The Potential Curse
Ever been tempted to purchase an item because they promise 18 months same as cash? Or perhaps you're shopping at your favorite department store and the cashier asks "would you like to apply for a credit card and save 25% percent on your purchase today?". Desperately in need of a new car, have you walked into the dealership focused solely on getting the monthly payment you can afford?
Warning!! Proceed with caution.
What sounds like a great way to SAVE money could actually COST you in the long run. The truth is any of these situations can work in your favor or have a totally opposite effect. What comes into play is interest rates.
Bankrate.com defines an interest rate as:
the proportion of an amount loaned which a lender charges as interest to the borrower, normally expressed as an annual percentage. It is the rate a bank or other lender charges to borrow its money, or the rate a bank pays its savers for keeping money in an account.
Why does interest matter?
Interest rates matter for a number of reasons. Let's consider all three examples from above.- No Interest for X months, Same as Cash: Maybe you purchase that item with intentions on paying it off in 18 months, but then something happens near the end of the 18 months preventing you from making a payment or paying the item off on time. Guess what happens, now your free layaway plan turns into an expense. Why? Because the company is now going to charge you interest from day one meaning you owe interest on the total amount of the credit/loan as if you never made one payment. When calculating interest due, they will not look at the remaining balance, I repeat, you will be charged interest on however much you initially owed. Tread lightly...
- Department Store Credit Cards: These can sometimes be hard to pass up, especially when you spend a lot in one particular store and can get additional savings by being a cardholder, but again, tread lightly. Often times, department store credit cards have some of the highest interest rates out there. If you going to get a card, pay the balance off in full when possible, and when that isn't possible, pay more than the minimum due. The lower that you can get the balance, the less interest you'll be charged. The interest varies, but many of these cards yield annual percentage rates (APRs) in the upper twenties. If you have a tendency to go swipe crazy, it's best to pass on these cards, that one time 25% savings earned when approved for the card can quickly be lost to the extremely high interest charges.
- Shopping for Cars: Car shopping can be really tricky, but one trick you don't want to fall for is one focused only on the monthly payment. When you walk into a dealership talking about the cost of the car note, you make yourself very vulnerable to shark tactics. I repeatedly had to tell a car salesman to stop asking me about monthly payments, but at that point had already decided he would NOT get my business. This post isn't about buying a car but you really want to focus on the total cost and talk specifics later. Say you managed a $300 loan on a $10,000 vehicle. Now say that same car could have been sold to you for $8,500 with the same $300 monthly payment had you negotiated the total cost and not just the car note. But once again, interest, in this case, can come back to hunt you. If you did not walk in with a pre-approved loan, you'll likely need financing which will depend on a number of variables and the rates offered may not vary much. At the end of the day, with all other variables the same, the lower the loan minus any down payment, the less you'll pay in interest over the term of the loan.
These are just a few situations where interest rates can be problematic. Make wise decisions for the short and long-term. Always be realistic, you know your finances more than anyone and always do your homework. When something seems too good to be true, often times it is.
But before you go...
When Interest Rates are a Blessing
Now high-interest rates are not always a bad thing. High-Interest Rates are what you look for as an investor, lender, bank customer. That means if you're able to find a high-yielding bank account, money market account, certificate of deposit, bond, etc. that meets your needs and you are able to maintain the minimum balance and other requirements, by all means...GO FOR IT! When you are the recipient, high interest is a blessing, high-interest rates are friends.
The equation is clear:
High Interest Rates + You (Payer/Borrower) = Curse😟
Hight Interest Rates + You (Recipient/Lender) = Blessing😁
Which do you choose?