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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?


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