What Is The Real Cost of Debt?

by Joe Plemon on January 18, 2010

Your debt is costing you. No shocker there. But how much? And in what ways? My guess is that you are being affected in ways you don’t realize. So let’s explore: what is the real cost of debt?

Actual Dollar Cost

When you borrow money, you pay for the use of that money. The price you pay is called interest. A family which owes $10,000 on an 8% car loan, carries a $3,000 credit card balance at 12%, has $20,000 in student loans at 6% and $150,000 home mortgage, also at 6%, would pay out $947 in interest that month ($67 on the car, $30 on the credit card, $100 on the student loan and $750 on the home).

Let that sink in a minute. $947 interest…one month. Are you starting to understand why banks have big buildings? All payment amounts above the $947 go to reduce principle, so as the principle is slowly paid down, the interest portion slowly decreases. But because many people think only in terms of whether they can afford the monthly payments, they tend to take out more loans as they pay off the current ones. If this family maintains the same debt level for 40 years, they will have paid $454,560 in interest payments. This is the actual dollar cost of their debt.

Lost Opportunity Cost

I define “lost opportunity cost” as the squandered possibilities of the money had it not been going toward interest payments. What if this family had invested this same $947 each month? Buying CD’s earning 4% would have turned this $947 into over $1.1 million dollars. Investments into mutual funds earning 8% return would create a nest egg of $3.3 million. So it is not a stretch to say that this debt is costing millions of dollars.

Marital Costs

When I ask couples their short term and long term goals, getting rid of debt easily tops the list. Because money issues are the number one cause of divorce in America, and because debt is a huge money issue, we can safely say that marriages are paying a high price for their debt.

Health Costs

Long term debt problems can cause chronic stress and chronic stress can cause depression, anxiety, heart conditions, diabetes, hair loss, excessive weight gain and loss of libido. Need I say more?

Creativity Costs

Proverbs 22:7 says, “The rich rules over the poor and the borrower is the slave of the lender”. Get that “slavery” part? Being in debt is slavery because debt controls the borrower. Debtors don’t have the freedom to pursue new career tracks because every decision must be based on, “How are we going to pay our debt?” Creativity is therefore stifled and the bumper sticker, “I owe, I owe, so off to work I go” is no longer funny.

What to do?

You might be swimming in debt, but you don’t have to stay there! If you are sick and tired of being sick and tired, decide today that you have had enough. Get angry and declare war on your debt. You are not alone. Millions have been exactly where you are today and have dug their way out of debt. Here are some practical steps:

  • Agree with your spouse.

Turn off the TV and have a heart to heart talk. Discuss your goals for your marriage and your finances.

  • Read.

This blog and lots of others will give you great ideas and encouragement. “How to” books such as “The Total Money Makeover” by Dave Ramsey will motivate you and give you a plan.

  • Form or join a support group.

Consider signing up for the 13 week Financial Peace University course. You will be encouraged as you join others seeking a common goal.

  • Pray.

God is the great liberator and he wants you to be free from the slavery of debt. The bible has over 1000 verses in it about how to deal with money. These verses never lose their relevance.

Can you think of other debt costs that I overlooked?


{ 6 comments… read them below or add one }

Craig Ford January 18, 2010 at 2:32 pm

Thanks for pointing out all of the costs associated with debt. I think many times in the personal finance field people think about every financial decision in terms of the calculator only. There is so much more to personal finance and this post really highlights that reality.


joeplemon January 18, 2010 at 5:24 pm

You are right…we often consider the “finance” much more than the “personal” in personal finance. And although I thought of several “non-finance” costs, I am sure there are others.
Thanks for reading. I always appreciate your thoughts.


Borrow Money Fast January 18, 2010 at 6:27 pm

Hmm, along the lines of your “marital costs,” going into debt can also cost you friendships or relationships with family. We all know how difficult it can be to say “no” to a friend in need. What if you find yourself unable to repay your debts to friends or family? Being in debt can also cause unnecessary strain in the relationships of those who we care about the most.


joeplemon January 18, 2010 at 6:36 pm

Borrow Money Fast,
I think you came up with a new category: strained relationships. Because borrowing from friends and family is a recipe for problems, doing so should be avoided. But once the personal loan is there and not being paid, the relationship will definitely be strained.
Thanks for reading and commenting.


Pam February 3, 2010 at 8:54 pm

I totally agree that bad debt has affects that go far beyond our finances. Thanks for pointing out the true cost of debt and just how negative it can be in our lives if we let our money control us instead of being in control of our money. I just read a great book called “Wired For Wealth” that was published last year that I think would be helpful for anyone who is struggling financially and needs help. I found the book really insightful in making me think hard about what I believe about money. Often people who go into deep debt have detrimental beliefs about money, and by reading this book I think they will find some guidance in how to change their money mindset.


joeplemon February 3, 2010 at 9:36 pm

Thanks for stopping by and commenting. Thanks also for sharing a great resource book, “Wired for Wealth” that has been helpful to you and hopefully helpful to others. I love books that challenge us to really think about what we believe about money.


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