How does interest work with debt

If you’ve ever purchased a house, car, or opened a credit card, then you’ve dealt
with interest. Interest is the price that someone pays for using someone else’s
money. For example, when you are the borrower, you pay interest. When you are
the lender, you earn interest, such as when you open a savings account.

How Does Interest Work With Debt?


Most people encounter the concept of interest when they open a credit card, or take out a loan. When
you spend money on credit, or borrow money, you have to pay for the service. You have to pay back the money
you borrowed and then pay back additional money, which is considered interest. The
interest is calculated as a percentage of the loan, or debt balance.


Because there are different types of debt, interest is calculated in different ways.
For example, in an installment debt, such as when you buy a house or car, your
interest costs are part of your monthly payments. When you pay monthly, part of
the payment will go to reducing your debt, and another portion will go to your
interest. In the beginning, you will mostly pay interest, but as the debt decreases,
the interest payment amount will decrease, and more money will go towards the
principal balance.


Credit card debt is considered revolving debt because you can borrow and pay periodically. As long as you stay within your credit limit, you can spend as much money as you want. For this same reason, interest on a credit card is
calculated daily. As your balance goes up, so will your interest payments.

Interest is calculated based on the money you owe, but the way it’s calculated can be different based on the type of borrowing that you’re doing. For example, in an installment debt, such as when you buy a house or car, your
interest costs are part of your monthly payments. When you pay monthly, part of
the payment will go to reducing your debt, and another portion will go to your
interest. In the beginning, the majority of your payment will go towards the interest cost.  As you continue making payments,
the interest portion will decrease and more money will go towards the principal balance.

The reality is, with the expensive cost of interest, keeping on top of your debt can be challenging! Many people get caught in a minimum payment trap because they continue making the smallest payment possible, which increases the overall cost to borrow. If you’re going to borrow money, it’s important that you have a foolproof plan to pay it back as quickly as possible. If you, or someone you know, is caught in this trap or is looking for help to quickly pay down debt (or reduce the cost of interest), reach out to us and we can help! 

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