What is credit?
Credit allows you to buy things even though you don’t have the money to buy it.
Interest is money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt
The easiest way to buy something on credit is with a credit card.
In order for money to be lent to you, someone has to win in the transaction. The company/person loaning you the money charges interest on the money lent. Let's look at an example of how borrowing money works, and who really benefits in the transaction.
Let's assume you've always wanted a new Audi A4. It would make you feel so awesome! (yes - I'm being scornful, but that's really what most lusts boil down to) A new Audi A4 sells for $36,500. By using a car payment calculator, we can quickly find out how much our payments will be.
| 36,500 | 4yrs monthly payment | 5yrs | 6yrs | 7yrs |
|---|---|---|---|---|
| 3% | $807.90 | $655.86 | $554.57 | $482.29 |
| 5% | $840.57 | $688.80 | $587.83 | $515.89 |
| 7% | $874.04 | $722.24 | $622.29 | $550.88 |
| Total paid @ 5% | $40,347.36 | $41,328 | $42,323.76 | $43,334.76 |
| Total interest paid @ 5% interest | $3,847.36 | $4,828 | $5,823.76 | $6,834.76 |
Look at the amount we paid in interest. It may seem like a lot, or a little, depending on your current income, but what would happen if we had invested the same amount over a five year period. We know we can make an average of 8-12% a year in a good Mutual Fund. So lets take the five years at 5% payment, and pretend we kept our current vehicle, and invested the payment for five years. We'll assume a 10% return on our money which is a good average. At the end of five years you would have $53,338.72 cash! You could buy your new Audi with cash, and have almost $17,000 cash left over.....hope you enjoy the car!
What is something you want bad enough that you would make payments on it? How much interest will you pay over the life of the loan? Is it worth it?
What does the Bible have to say about borrowing money?