The real cost of debt

If you think nobody cares if you’re alive, try missing a couple of car payments.

— Earl Wilson

Debt’s bad, debt holds you back, debt ruins lives, blar blar blar. I’ve banged on long and loud about debt and the problems it causes. But even with writing article after article and telling everyone I meet about how bad debt is, I discover debt is still around.

So let’s play a good game. It’s called “The Real Cost of Debt”, with a subtitle of “Money You Like to Earn Then Give Away Immediately to Other People so That They Can Become Rich and You Continue Working Until the Day you Die.” Catchy!

The rules are like this. Make a list of all the debts you have, mortgage, loans, credit cards, overdrafts, pay day loans, late library fees, everything. Put all the names in one column and in next column how much you owe in total. Then in the third column put the interest rate of each debt. Now we’ll work out how much each piece of debt costs us every month. To do this I used various calculators from the amazing

For an example we’ll use a fictional person, Wayne, with some debt.

  • Mortgage – £280,000 – 3%
  • Car finance – £20,000 – 4.9%
  • Credit card – £10,000 – 19.9%
  • Bank loan – £5,000 – 3.6%
  • Total debt £315,000

Now let’s look at the amount of interest paid on each piece of debt.

Mortgage – £280,000 – 3%
The mortgage has just begun so Wayne will be paying the highest amount of interest as he has 32 years to repay his debt, and the interest is highest at the beginning of a mortgage.
The first year of interest will cost in total £8,327.59.
An average of £693.97 a month!

Car finance – £20,000 – 4.9%
With his new house Wayne also had to buy a new car that he’s financing over 5 years.
The first year or interest will cost in total £449.72.
An average of £37.49 a month!

Credit card – £10,000 – 19.9%
Wayne bought a load of junk to fill his new house, like a second TV for the kitchen and a rowing machine for the garage, although it’s already full of unused stuff from his previous house.
As Wayne is paying so much back on interest already, he decides that with his credit card he will only repay the minimum payment of £166.
Working out interest of a credit card crashes my calculators. That’s how big it is.
The first year or interest will cost in total £1,705.
An average of £142 a month!
Oh yeah, and just to mention, that £10,000 will take 35 years to repay and cost £59,678.30 in interest alone. Almost 6 times the cost of the initial debt. That 12 slice toaster better be worth it!

Bank loan – £5,000 – 3.6%
Wayne owed some people some money. Don’t ask. So he got a loan from the bank over 5 years.
The first year of interest will cost in total £94.
An average of £7.85 a month.

So let’s finish the game and add up the scores of how much each debt costs Wayne per month.

Mortgage £693.97
Car finance £37.49
Credit card £142
Bank loan £7.85
Total £881.31, just in interest! Remember I didn’t include the principal amount of the debt where he actually pays for his house and car.

That’s a yearly interest payment on debt of £10,575.72!

If you put that in the stock market, and got a 10% return for the next 30 years, and you never added another penny to it, after 30 years you’d have £184,539.99.

That, my dear friends, is how much debt is costing you. And remember, the above is only for 1 year! There’s loads more years of paying back interest when you’re in debt.

Imagine putting £881.31 a month into the stock market with the 10% return and 30 years. You’d end up with £1,818,004.

Debt. It’s a right git, I tell you. Do everything you legally can to get out of it as fast as you can.

Author: The Pound Pence Team

We're Garry and Dave, and we're addicted to talking about money. We want to help as many people as possible become financially free by setting financial goals, getting out of debt, building an emergency fund, saving into their pension, buying their own property and investing for the long term over many decades. We don't do get rich quick, but we do get rich.

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