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What Is The Real Cost Of Debt?

cost-of-debt

Debt is, without a doubt an incredible burden on your relationships, wallet, well-being, and confidence. Beyond the obvious interest on credit cards or a mortgage, the real price of debt is reflected in other areas of your life. Understanding the real cost of financial decisions which lead to more debt may be the way to better your financial management and life overall.

So, what is the true cost of debt? The true cost of debt can be calculated as the actual cost of a loan or credit card, i.e. interest. Of course, there is also the cost of the lost opportunity. Here are some details about the real cost of debt from two different perspectives:

Actual Cost

Every form of borrowing money is considered debt, whether it is a student loan, home mortgage, credit card, or car loan. Regardless of the lender, all loans have a price called interest. The interest rate is a percentage of the outstanding amount per year and it is different from lender to lender and also from loan to loan.

In order to calculate the actual money you pay every month for your loan or loans, you just need to cumulate the monthly interest for each outstanding amount. The amount may be smaller or bigger depending on the sum borrowed and interest rate. In the end, you may end up paying up to 1,000 dollars per month in interest for a mortgage, car, student loan, and an additional credit card.

That is what you pay monthly and it would be alright if most people stopped borrowing after they`ve paid off all of their debt. The problem is that most people don’t stop. They tend to take additional loans as they pay off old ones, continuing the cycle that can take a life time to pay.

What It Could Have Been

If you have been making a payment of $500 for years, you could have used that same amount to make a relatively secure investment, such as a mutual fund, which would have generated thousands of dollars over time.

Other Collateral Costs

Debt puts a strain on relationships and many marriages end because of this tremendous pressure. When they see no way out, people blame each other for financial decisions that led to debt accumulation. Chronic stress is one of the negative effects that “chronic” debt can have on your spirit. Unfortunately, chronic stress can lead to other complications, including heart conditions and diabetes among the most serious. You can also take into account excessive weight gain, hair loss, and depression.

In the end, the cost of debt is different for every person and family. Using loans wisely and holding reasonable debts for reasonable things is one way that you can control debt and not the other way around. To learn more about getting control of your debt, fill out our online contact request form today.

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