Interest rates and why they matter!

A recent US Army WTF moment post highlights a Soldier getting swindled into a car loan with 21.5% interest. The post, while seemingly humorous, is no laughing matter. Interest rates are an important consideration when financing anything… whether it be a car, a house, or credit card debt.

It’s not a great Deal SGT, you’re paying $74,000 for a $41,000 car

Interest is essentially money we pay to borrow money we don’t have to purchase things such as homes, cars, mattresses, and other items. Interest rates for certain products such as mortgages are generally driven by the federal reserve. Monetary policy determines the price we pay to borrow money. If you are interested in learning about how that is determined, it’s worth reading a macroeconomics textbook.

If you’re interest in learning how interest rates affect your wallet, however, we will discuss that here. Your interest rate is generally based on your credit. Good credit gets you a better rate, bad credit gets you a worse rate (higher is worse). We’ll take a look at two different scenarios based on the private’s Volkswagon Tiguan purchase depicted above. One in which he pays 21.5% interest as shown and one in which he gets a loan at 2% interest. The difference is astonishing.

A look at our friend’s payments from the loan above
A look at what a reasonable auto loan would cost

Take a look at the two pictures above and it tells you the story of why interest rates matter. The monthly payment on the 2% interest rate loan is over $500 less than what our friend who purchased the vehicle on US Army WTF moments pays. Over time, the total interest is nearly $30,000 less than he pays as well.

So, what’s the takeaway here? First, never trust a car salesman who promises to get you in a car no matter what. Also, don’t let your Soldiers make that mistake. Second, it pays to have good credit. If you want to learn how to boost your credit score take a look here. In the long run, it could save you a lot of money! $

Categories Finance, loans, Personal FinanceTags , , , , , , , , , , ,

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