In my last post, I told you two ways your loan balance can continue to increase.

Even when you are making your minimum monthly payments, 

• if you miss your minimum monthly payment, and/or
• whenever you are allowed to pay less than your minimum monthly payment
  • your loan balance may continue to increase.

Other scenarios in which your loan balance will continue to rise:

A ‘debt relief’ program promises you can make ‘smaller payments’

• than the standard/reasonable minimum monthly payments, and
• used by some unscrupulous lenders to trap you
  • into perpetual debt.
• Some government and/or education loans repayment plan are also
  • income driven, i.e. based on
    • how much you earn not
    • how much is required to pay off the loan
      • in a reasonable period of time.

Photo by rawpixel.com on Pexels.com

Photo by Burst on Pexels.com

• Example 1: you owe $25,000, at 15% annual interest rate computed on the balance each month
  • The minimum payment is 2% or $500.
    • “That’s too high”,  you say,  “can you help me?”
    • “Can I pay $200 per month please?”
    • “Sure”, the lender says, “just for you!”
    • What you may not realize is that
      • $200 does not cover your monthly interest ($314).s
      • The difference ($314 – $200)
        • is added to your loan balance
        • (the interest has been ‘capitalized’)
          • which continues to earn interest.
• Example 2: The Education Department Income Driven Repayment Plan (IDRP)
  • provides relief to people allowing them to make payments
    • based on how much they earn
    • on loan balances that earn interest each day
      • until the to total balance is paid off.
  • As above, you may be making all regular required payments
    • but your actual loan balance could be increasing!!

You make regular minimum payments but

• if the interest rate is high and if
• the loan balance is continually earning interest,
  • your loan balance will continue to increase; in fact
  • the loan balance will double approximately
    • every 70/(interest rate) years
      • according to the ‘Rule of 70’:
        • an amount that grows at the rate of ‘x’ per period
          • will double approximately every 70/x periods.
    • Example, a credit card balance of $25,000 at 15% annual interest rate
      • will double every 70/15 = 4.7 years (4 years and 8 months)
      • If you make every minimum required payment of 2%,
        • The balance will double every 70/13 = 5 years and 5 months.

Note: 

• Some credit card loans will have lower/higher interest rates.
• Some loans (some mortgages, car notes)
  • have interest calculated over the life of the loan.

Final Take Away

• If possible, avoid loans
  • for which the interest rate is calculated frequently
    • on the outstanding balance.
• Make sure your minimum payments at least cover your interest
  • in each period.
• Make sure your minimum payments covers some of your principal each time
  • If not the make additional payment to cover
    • paying down your principal.

Please follow Reach Ministries on twitter, Facebook, and YouTube (coming)

Email me at reach4himwdray@gmail.com

You Can Do It!  Let’s Do This!!