‘Tis the season for spooky movies and scary stories, but some student loan borrowers need only look at their debt balances for a true fright.
Maybe you have your debt under control and you’re making your monthly payments on time. It can feel like your debt’s not that big of a deal because you’re handling it.
But that doesn’t mean your debt isn’t costing you frightful sums. In fact, you’re likely paying hundreds of dollars a month or thousands of dollars a year toward interest alone.
Want to find out whether your debt is truly ghastly? Here are some key numbers you can look at to put your balances in perspective.
1. The total interest you’ll pay
Debt, by definition, makes everything more expensive through the interest charged on borrowed money. The true costs of debt can go unnoticed, but it adds up and drains important financial resources over the life of your loan.
Student loans, for instance, make college significantly more expensive than just the upfront costs. The average student loan balance for a 2016 graduate is $37,172, which likely already includes some interest charges from unsubsidized loans.
But in the course of a 10-year repayment plan with 6% interest, the total interest will add up to $12,350 — a 33 percent increase from the initial $37,172 balance. That means the typical college student’s education costs end up being a third higher when they use student loans to pay.
Use the calculator below to find out the total interest you’ll pay on your own student loans or other debt, and see how much prepaying can save you.
2. Your monthly interest cost
In addition to the total interest you pay, consider how much your debt is costing you each month — not just the monthly payment you make, but how much you’re charged in interest. This is a cost that could be avoided by paying debts off.
In the case of the average $37,172 student debt, for instance, a borrower can expect monthly payments of $413. But when repayment begins, nearly half of that, $186, goes toward interest alone. This amount will lower as the balance slowly ticks down, but the fact remains that simply having the debt is adding $186 to your monthly costs.
The amount of monthly interest accrued is even scarier for high-interest debts, like credit card balances. The average credit card balance is $6,662 per cardholder. With an interest rate of 20%, this debt costs you $261 a month, or $3,135 a year.
Want to know how much your debt is costing you? Here’s a formula to use: Divide your interest rate by 100 (20% for instance, will be 0.2). Then divide that by 12 (0.2 becomes 0.016). That is your monthly interest rate — multiply it by your balance and you’ll have the monthly interest cost of your debt.
3. The opportunity costs of your debts
Opportunity cost is an economic principle that acknowledges that when a person makes a decision, they are saying “no” to other opportunities. These missed opportunities are part of the costs of the decisions we make.
If you have student loans, you’ve dealt with opportunity costs in the past. As a student, you faced the upfront costs of attending college. But there was also the opportunity cost of devoting time to your studies instead of working and earning money.
Your current debt also incurs opportunities costs right now. Instead of getting to decide how to use all of your money, you have to make payments to lenders. You can also miss out on important opportunities to grow your wealth, like saving more for retirement.
Take, for example, the $413 monthly payment on that average 2016 graduate’s debt. If these same graduates could put that $413 into a retirement account instead of toward debt, they’d save just under $5,000 a year.
At the end of ten years, the balance of this account would be about $69,551 (assuming an average annual return of 6.5%), with more than $19,000 of earned interest. Those ten years of compounding returns on their investments is not something they’ll ever get back.
This means that on top of the $12,350 in student loan interest they’ll pay, there’s an additional opportunity cost of $19,000 toward retirement savings.
To see what your monthly payments would add up to if used for retirement savings, use the calculator below.
4. Your credit score
Maybe you have a scary-low credit score. Maybe just the idea of your credit score is so scary you haven’t been able to bring yourself to check it recently.
A credit score is how a lender judges your debt management, and it can say a lot about how you handle loans and credit. A poor credit score, around 650 or below, is a sign that your debts are a problem. Even scores between 650 and 700 can mean there’s room for improvements.
Consider how you got bad credit. The most common mistake that leads to poor credit is making late payments or missing payments. It can also be a sign of other potential issues, like a high credit card balance that’s close to your limit.
Not only does a bad credit score prove you’re not managing debt well, it can stick around to haunt you. Lenders will be less likely to approve you for loans you need, like a car loan or mortgage. If you are approved, you’ll get higher interest rates that will make these new debts cost more.
If your debts don’t seem that frightening, take a second look. What you see might be enough to scare you straight, and motivate you to pay debts down faster.
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