What Matters More: Your Rate, Balance, Term or Payment?

Quick question: Would an extra $4 a month really rock your world in a big way? There’s a new radio campaign out from one of the no-service banks: Switch your credit line to us and save half a percent in interest. Plus, the guy in the commercial says he now sleeps much better and worries less.

OK, that’s stupid. If you don’t owe anything on your credit line, the rate doesn’t matter at all. If you owe $10,000, a half percent interest saving amounts to $4 a month. That’s going to help you sleep better and worry less? Even with a $20,000 balance, it’s a lousy eight bucks a month saving! Hello?

The ad may sound great, but shouldn’t get anyone excited. We get ourselves into a big financial mess with two things: Focusing only on the rate or purely the monthly payment.

When it comes to borrowing, there are four things you’ll need to know:

The balance or total amount you’re borrowing
The interest rate
The term of the loan – how long you’ll owe the money
The payment per month

The payment is the least important factor. Sure, it has to fit your budget, but you can pretty much have any payment you want – you just have to stretch the term to a really long and stupid time period. A car can get financed for three years, or up to seven years – your call, your interest, your pain – if you’re not careful and don’t ask!

The rate only matters if you owe a lot of money AND you owe it for a long period of time. You’re better off owing $5,000 at 20% for a year than owing $5,000 at 6% for a decade! The faster you pay it off, the less the interest matters since the debt isn’t going to be around for long!

That leaves the balance, or the total amount you owe or borrow. THAT is the most important factor. News flash: If you don’t borrow anything – the rate doesn’t matter and your payment will be ZERO! Want to guess how many foreclosures, collections, repossession or legal actions happen to people who don’t borrow money? NONE – that’s right!

If you can lower what you owe, borrow less, get a little less expensive renovation or car, take some of your savings as a down payment, or any one of a dozen other ways, THAT controls everything.

Focus on what you are paying and not what you’re saving. Focus on the balance and not the rate! Four bucks a month is not the issue, it’s the payment of $300 or so, the balance you owe, and the fact that your line of credit likely has your entire house for collateral!

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