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How Much Interest Are You Really Paying?

February 20, 2012 | Comments: 0 | Views: 156

How would you like a 34% raise? It may sound like a silly question but consider this:

If you're the average American, you are paying an average 34% of your after tax income in interest!

Think that's high? Think again. Even if you have good credit, shop carefully for rates, you can easily still be paying 34% of your after tax income in interest. Here's why:

Price and interest are the two factors that everyone uses when calculating the cost of credit - but those two factors do not determine what percentage of your income you pay in interest. What determines that is the volume of interest you pay.

How does the volume of interest work?

Imagine you buy a car for $30,000, you get a 5 year loan with an interest rate of 7.5%. How much do you think you will pay in interest for the car? Most people will multiply 30,000 by 7.5% and give an answer of $2,250 - but they'd be wrong.

You would actually end up paying $6,068.31 a whopping 20.2% of the amount you borrowed!

How is this possible?

It happens because you don't pay straight interest on a loan, which is how most people figure the cost of credit. You actually pay an Annual Percentage Rate (APR). The 7.5% figure is actually the rate you pay on the balance of your loan every year! Because of APR, the amount you pay for a loan is much higher than most people think it is. The APR is your true volume of interest - the full amount you will pay on your loan

Volume of Interest Adds Up!

Say you finance 10 cars at $30,000 each over the course of your life. If you get 7.5% interest for 5 years each time then you'll pay about $6,000 in interest each time. Over the course of your life, you will have paid $60,000 in interest. That's a lot of money, considering that the Average American saves about $88,000 for retirement!

Keep in mind that credit cards also charge an APR on the purchase balance, and you can easily see how most people's paychecks are gone before they're even cashed. If you have ever wondered why so many credit counselors urge their clients to "cut the cards in half" now you know why.

There are responsible alternatives to credit. You can save up for the things you want and pay cash, or buy life insurance. Why life Insurance? Because a properly structured whole life insurance policy can allow you to borrow against it - and pay yourself back! Imagine borrowing that same $30,000, but paying the interest to yourself. Why not put it towards your retirement rather than your bankers?

If you are ready to embark on a safe, responsible financial path, visit us today at:

Federal Financial Group Consumer Advocacy Outreach

Source: EzineArticles
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