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- Debt & Bankruptcy
Hey Doctor, Put Your Money Where Your Debt Is
Banks and lenders have a dirty little secret cataloguing and masquerading itself as interest. What they know and understand about how interest works allows them to make a consistent and profitable return on the money they lend to you. If you are servicing a loan in the form of monthly payments, you are undoubtedly paying interest and accepting its effects as “the cost of doing business”. Whether the rate is large or small, there is often no way around paying interest or avoiding it all together (unless of course you are paying cash for capital purchases, which presents its own set of secrets).
What does debt really look like?
What does interest really look like? Take a recent doctor with $200,000 in medical school loans, at a 6% interest rate paying over 30 years. With a monthly payment of $1,199.10 per month, this doctor will have repaid not $200,000 at the end of the 30-year term, but $431,677; which is not really a 6% interest rate, but rather a 116% effective interest rate. The concept and reality seems nothing short of loan sharking, however it is completely 100% legal.
Why so much Interest?
The reason why so much interest accrues on student loans and other amortized debt, is because they are typically front-loaded with tons of interest. The average 30-year loan takes almost 21 years before the principal is significantly tackled as opposed to servicing such a large portion of interest. Lenders are well aware of this disproportion and ultimately hope you never are.
What if there was a better way?
If there were a better way or a more optimal form of repayment in order to keep more of the money that would be going to interest in your pockets instead of the banks, would you want to know about it? Or are you more prone to acquiesce to the way the banks want you to continue to repay your debts? Either way, it’s your money.