When it comes to financing anything that is of a large amount, you’ll often times be given the option to pay in a long term payment plan. These are nothing new because as more goods and services cost upwards of six figures, people can’t pay for them out of pocket. Let’s assume you wanted to purchase a home, you wouldn’t be able to just bring in a large sum of cash and purchase it out right, at least not if you’re one of the millions of people that don’t have the financial resources to do so. If you need to get a loan, than you’ll want to pay close attention to why a high interest rate on a long term loan can hurt you.
First and foremost, getting a long term option is not a bad thing, this is often times done to reduce the amount of the monthly payment that you’ll have to adhere to. Whether you’re buying a house, a boat, or a car, you’ll find that the price drops dramatically depending on the amount of time that you decide to take to pay it back. The lender will dictate whether or not they will want to move forward between a few years and much longer. For the sake of real estate, you’ll often hear about 10, 15, and 30-year loan options.
There are traditionally no problems with getting money and paying it back, the issues start to rise when dealing with what is known as interest. This is a monetary value that is placed in addition to the sticker price of any large ticket item. The rate varies based on credit score, history, and many other factors. When you have to deal with a high rate, you could find yourself in trouble in the latter years. Let’s say you had a home that cost 100,000 and you had a high interest rate of around 30% (this is only for illustration), you would have to pay 30,000 more on the home, meaning that your home doesn’t necessarily cost only 100,000 it will end up costing 30,000 at the end of your terms.
The preceding simplified model is only done for illustration, but if you understand that simplicity then you will definitely understand why the higher the rate the more problems that can arise. When dealing with rates, you can either have a fixed option that stays steady at whatever the market price is or you could have a variable option. The variable kind will shift up and down depending on the economic climate and can sometimes raise a monthly mortgage or payment to far higher than the reach of a person’s income. It’s for that reason that fixed rates are often times better to get into than any other option.
High rates of interest will cause turmoil in terms of finances because most people aren’t prepared to deal with calamity that might strike. If one were to lose a job, or find themselves dealing with health care issues or anything that requires a change in economic outlook, the interest can really cause serious problems.
