Friday, 24 August 2012

When Less Means More

A major catch that has resulted in many a commercial bank, or a domestic furnishing and appliance store to make a killing at our expense is the lower premiums they charge us for loans and hire purchases.  The real killer here is compounding; being charged interest on interest.  This actually causes the principal sum growing in real terms.  They won’t tell you that though.
Now if you think that was bad, wait till you hear this.  Things may even get worse!  Ever heard of refinancing? Is that a good, or a bad thing? 

Well, it depends.  If your loan account is young and you’re at the stage where you’re paying mostly interest then a cheaper loan could help you.  You’ll replace the original rate with the lower which will allow you to pay less for the loan.  But wait!  Make sure you’re not paying any less per month, otherwise you’ll just end up paying the same amount or more that would have originally paid anyway.

If, on the other hand, your existing loan account is aged, and there is less paying time ahead of you than there is behind you.  Refinancing may not be for you.  At this stage the major portion of your payments will go towards paying down the principal.  This means that your creditors are making less money.  The way for them to make more on what’s left on your loan is to get you to refinance.
Remember, as a rule of thumb, the quicker you pay off your loan the less expensive your loan is.  Of course this means bigger individual payments.  Here you have to decide whether you’re going to have your cake, or eat it; accept that you have a loan and make lifestyle adjustments, or just live as usual.  Make the changes.

So smaller payment amounts or smaller interest rates, more often than not, mean paying out more.  Weigh the pros and cons before you enter into a loan agreement.  As far as it is possible live a debt-free life.  After all, the Bible does say, “Owe no man anything, but to love one another….”  Rom. 13: 8.