Boy is it expensive to be poor! Why? One big reason: INTEREST! Unfortunately most people do not have enough cash lying around to buy a house or a car cash. Not even bigger appliances or furniture. So what do we do? We finance it. We get the “privilege” to pay off the amount in instalments so we do not have to pull out all that cash out at once from nowhere. But most people, I suspect, do not realise how much more they end up paying in the long run for those items they bought on credit.
A very simple example from my own life. The first car I bought had an amount of R56 000 I had to pay off over the course of six years. Of course that is just the capital amount (before interest). Adding the 12% interest over this time period I ended up with a total amount payable of R80 000. That is a total amount of interest of R24 000!
Imagine you wanted to buy a house. Say you borrow a R1 000 000.00 from the bank for a period of 20 years at a fixed interest rate of 10%. Using the calculator on the bank’s website the monthly instalment on such a loan would be R9 650.00 per month. Okay, now let’s multiply that installment for the 240 months you would be paying it for. What?! That is a total of R2 316 000! That is more than double the original amount!! Imagine what you could have done with that R1 316 000 instead of paying it to the bank!
And of course that TV you bought from the furniture store that you financed? Retail stores’ interest rates are especially high. Their interest rates are around 20%. An example I took from a Game Stores leaflet, a TV of R3999 that you can buy on credit for R237 per month for 36 months at 21.5% interest would end up costing you a total of R8 521. Again you end up paying R4 522 more than if you just paid cash.
Then of course the unfortunate happens. You forgot about the yearly payment of something like your car’s license renewal. Oops! Now you don’t have all the cash on hand so you end up paying it a bit late. Once again your lack of money is ending costing you more money because now you have to pay late payment fees and penalties and often extra interest.
Conclusion : A lack of money is costing you more money in the long run due to interest