Financial outlook

Same bank letter – different responses. The letter came in the late 1970s as interest rates began accelerating to the double digit highs of the 1980s. After happily making housing loans with 4, 5 and 6 percent interest rates for 20 to 30 years, bankers wanted out of those low paying loans. They wanted their money from those borrowers comfortably settled and uninterested in moving into another, higher mortgage. To make more money on the principal, the bank asked their customers to re-negotiate the loan payments. The bank promised, if the borrower agreed to pay a larger monthly payment – the bank would drastically reduce their interest rate and the loan would be repaid in months instead of years. One letter, two families. One family looked at the letter, did a quick mental calculation and embraced the idea, gloating to family and friends about the great deal. Paying off the loan would free up their ready cash sooner and allow them more financial freedom during their children’s college years. The second family looked at the letter and did a quick mental calculation about how much more they would pay each and every month. They grumbled and complained to family and friends about the rotten bank wanting more of their money just because their income had increased since the loan. They could not believe the bank would want them to hurry up and pay off that loan – not when they still had children in the home. Same proposal, but vastly different responses. One saw: Quicker pay-off and one step closer to being debt free; the other saw “they want more of my money.” Those who agreed to pay more per month would pay thousands less and those who refused to pay more per month would ultimately pay much, much more over a much, much longer period of time. The bank had no personal interest in either of the two households’ income, expenses, family size or needs. The bankers just wanted to make the most money they could. Having old, low interest loans paid off quickly meant more money available for the higher interest loans. Paying off any loan early saves a lot of money in the end for the borrower. I saw this recently when I perused our most recent monthly credit card statement. Yes, we use credit cards – the kind that allow us to accrue points for cash. My husband and I charge as many of our expenses as we possibly can each month. Whether paying for gas, groceries, incidentals, house repair, car repair or online purchases of items not sold locally, we pull out the credit card. It totals up to quite a bit each month, but since we make it a rule to only charge what we know we can pay off each month, we write one check each month instead of several. For that reason, I usually do not look at the payment options. But this month I did happen to notice the projected options and was shocked to realize how much we saved by paying it all every month. If we had paid only the minimum on just the amount we charged this month and added nothing else to the principal, it would take us 14 years to pay off 30 days of credit spending. Astounding! Forget any emergencies that might come during those 14 years justifying an additional credit charge, just paying the minimum payment on that one month’s debts would cost me about five times what I had charged. Good night! Of course we pay it off. We don’t want to support our friendly credit card salesman. We can grumble and refuse to pay it off quickly or we pay and accrue pay-back points for cash. Repayments will be made on loans – the difference is the amount of interest the individual chooses to pay on the house, car or credit card loan. Paying the minimum provides a bit more ready cash today, but paying ahead saves hundreds and thousands of dollars in the long run. It’s nice when banks provide an incentive to pay ahead, but the reality remains even when the bank does not add an incentive: Paying off credit cards or paying ahead on bank loans saves money. Seeing only the short term cost of the monthly payment keeps many from realizing the long term benefits of getting out of debt quickly. The new credit card statements lay out the full cost in black and white – and you don’t have to wait for the bank to send an early payment proposal. You just have to say ‘No’ to a few things you can live without now, for a lot more debt free living later. (Joan Hershberger is a reporter at the News-Times. E-mail her at jhershberger@eldoradonews.com.)