Cut your monthly payments in half!

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There’s an ad that’s been playing on the radio lately, advertising to cut your monthly credit card payments in half by working with some sort of loan shark lending company. Is this really such a good deal?

It depends, of course, on how much you need the extra money right now, but I decided to play around with the numbers a little bit just to get a sense of how much those lower monthly payments actually cost. By way of example, I assumed the amount of debt was an even $7,000, because that’s somewhere around what different sources say is the mean credit card debt per household. I also initially assumed that the interest rate was 10% (compounded monthly) which is high for mortgages but low for credit cards. Finally, I assumed that the interest rate would stay the same, and that the lower monthly payments would be offset by being in debt for a longer amount of time.

Let’s suppose that you owe that $7,000 and are paying 10% annual interest, and you’ve decided that you want to be debt-free in 5 years. You can accomplish this by paying $148.73 per month, for a grand total of $8,923.80. That’s your initial debt of $7,000, plus $1,923.80 in interest.

What if you want to cut that monthly payment in half? You’ll need to extend your payments not to 10 years, but to between 15 and 16 years because of the magic of compound interest. Keeping the $7,000 and the 10% interest rate, equal payments spread over 15 years would require a monthly payment of $75.22. And the benefit for only having to pay (just over) half as much each month? You’d pay a grand total of $13539.60. That’s right, the amount paid in interest — $6,539,60 — is more than triple what you would have paid over 5 years!

If your interest rate is higher, like 15%, the picture is even bleaker. Paying off $7,000 over 5 years at 15% annual interest results in a monthly payment of $166.53, for a total payback of $9,991.80. But in this case, cutting that monthly payments in half is impossible. The least you could pay is $87.50 per month, and that would just cover the interest so your actual debt would never drop down. Not really good money management.

I do believe that sometimes cutting the payments down for a while is the best scenario for an individual, even worth the added cost. But when I hear ads like this I’m reminded of a friend who’s job for a short time was to try and “help” people by making offers just like this. She hated it, and she quietly cheered when a customer would check more into the numbers and realize that it wasn’t such a good deal in the long run. She quit that job as soon as she could.

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