What you want is to put your money in a place where you can earn compounding interest. Most have no idea that home equity lines of credit have compounding interest monthly as well. Some student loans compound daily! You all know credit cards compound monthly. Credit cards, home equity lines of credit and student loans have compounding interest. You do not want to have a loan with compounding interest because it will continually increase the and is very hard to get ahead with. One grows while one decreases! It is just that simple.
Amortizing interest is set and you pay it down. How in the world can a 5% interest charge cost less than you make on 4% earnings? Because with compounding interest you are earning money on money on money. While a $30,000 loan at 5% with amortizing interest, cost $3,968 of interest over the same five years. What you see is $30,000 compounding at 4% interest over five years has earned $6,630 in interest. This graph represents the effects of compounding vs amortizing interest. To illustrate the difference between the two takes a look at the below graph. You then pay down this interest amount over the length of the loan. This is an ever-increasing event.Īmortizing: This is when your interest amount is set based on the principal at the time a loan is taken. There is a difference between compounding and amortizing interest and the difference is huge!Ĭompounding: This is when interest is added to the principal balance, again and again, each month, quarter, or year. Like so many others, I am not sure this individual knew their student loans compound monthly and some even daily! I knew this was an issue that had to be addressed when I had someone make a comment about how amazingly fast their student loans are growing.
Bigger issues are what is in that monthly payment and how is it figured. Instead, you are brainwashed to focus on the monthly payment.
This is another one of those things you are not taught to look at. You have been told to focus on interest rates and I am here to tell you it’s not about the interest rate itself, it’s also about the type of interest. This one little word – compounding- can change it all. Today’s blog has the answer to one of the reasons you may not be getting ahead and stuck spinning your wheels.
0 kommentar(er)
