When does interest stop being interesting?

You all know I was $28,000 in student loan debt when I graduated. I consolidated my loans with Sallie Mae so I could pay them back over the next twenty years. My monthly minimum obligation was $200. After about three payments, I got sick of making them. I was annoyed by the fact that I owed someone money and had to give them a portion of my hard earned income.

As much as I didn’t like the idea of payments, the thing that really drove me to punch Sallie Mae in the face was the interest rate on my loans. Had I graduated just a few years earlier, the interest on these federal loans would have been about 2%. Unfortunately, I graduated college at the worst  possible time, right when the economy was peaking, meaning the epic crash took place just a few months later. Instead of being able to consolidate my loans at 2% like my sister had, Sallie Mae offered me a whopping 7% interest rate. SEVEN FREAKIN PERCENT!!!!!!

So when my minimum payment was $200 a month, $163 of that was going to interest and only $37/month to lowering the balance. How dumb is that?! Had my interest rate been 2%, $46 would have gone to interest and the rest to lowering my balance. Seven percent interest was absolutely unacceptable to me (and it should be for you as well).

Heck, even when we bought our car last week I entertained the idea of financing part of the cost. I figured with a good credit score I’d be able to get a used car loan around 3% and keep a decent chunk of liquidity on hand. But then I thought, why the heck would I pay any interest when I don’t have to? It’s not like I was planning on investing that money in the stock market and earning greater than 3%. It’s not like it would have depleted my emergency fund and left me cash poor. I just couldn’t bring myself to take on a loan. It would have been stupid.

So we hear people say all the time “you shouldn’t cary high interest debt.” Well friends, today I pose the question, What does high interest mean to you? For me it definitely meant 7% on my student loans, and even 3% on a car loan. I guess the only interest I don’t consider high is a REASONABLE mortgage on a 15 or 30 year loan. Hows about you?

26 thoughts on “When does interest stop being interesting?

  1. A 30 year loan is insidious. The amount you pay in interest is quite high and you don’t really hit the principal until about 20 years into the loan. That part really bugs me. Also, over the longer term, the cost of the mortgage can double the purchase price of the home! In a perfect world, buying a house in cash would not only save you on the interest charges, but there are minimal closing costs as well.

    • Disregard this post…I don’t think I am coherent at this moment 🙂
      My apologies…

  2. Hardly any one can pay cash for a house. Many can’t pay cash for a college education, some can’t pay cash for a car. I can’t think of too many other circumstances under which a long-term loan would be justified (maybe a very expensive musical instrument like a high-end grand piano, or something like that). So you either accept the fact that you’ll have to pay interest, at the best rate you can get, or you do wthout. Interest is the price you pay for acquiring an expensive asset that you can otherwise not afford. Just think of it as paying an ultimately higher price in exchange for the ability to spread out the payments.

    • It’s not just about paying cash. I obviously didn’t pay cash for my college education. BUT that doesn’t mean one should continue to pay minimum payments on 7% interest if they have the capacity to pay more. Obviously people who don’t have the means to pay down more aggressively can’t. No arguing that.

      • “BUT that doesn’t mean one should continue to pay minimum payments on 7% interest if they have the capacity to pay more.”

        I don’t think I suggested that. By saying “pay interest at the best rate you can get,” I imply as well that if you have the resources to pay more than your minimum, you will lower your interest rate by accelerating the repayments.

  3. As with all things, it depends.

    We took out a loan on our $30k car, because the rate was 2%. Over the life of the 5-year loan, we’ll pay maybe $1k.

    Do I want to pay that $1k? Not really. But paying $30k wipes out our emergency fund, and our next-house-buying fund. $1k is not a lot of money to spend for the peace of mind in knowing that we have cash-on-hand.

    Our house, on the other hand, is a different story. You should always overpay. You should attempt to pay as if it were a 15 year loan, when you have a 30 year loan. If money gets tight, then just lower your payments. You’re paying a little more interest for a 30-year-loan than a 15-year, but in return, you’re getting the flexibility of being able to increase your cash-flow on-demand.

    Never ever accept a new line of credit for something trivial though. Computers or other electronics should just be bought straight-up. You’re wasting your time getting a line of credit for any of that stuff, and you’re hurting your credit score.

    • This sounds a lot like our strategy – we’ve got a 30-year mortgage with 6.5% interest, and unfortunately refinancing isn’t a strong option for us right now (tried late last year and ended up cancelling since fees QUADRUPLED without explanation, yipe!). We’re being more aggressive with all our debt payments, working on the highest interest debt first. Right now, that happens to be the remainder of my student loans – they just went into repayment this year, and I should have them paid off by the end of summer. We’re also padding our mortgage payments so that we’re making at least 1.5 extra full payments a year, all going to principal. At this rate, assuming we stick it out in our current home, we’re going to be paying off the loan about 8 years early and saving about $84K in interest payments.

      Once my student loans are paid off, then we focus on that mortgage and on my husband’s student loans. I’ve yet to decide what to do – do I more aggressively pay down the SL of ~$26K @ 3.875% interest with a monthly payment of $200+/month, OR do I go for the long term benefit of paying additional extra principal on the $170K+ 6.5% mortgage? Getting rid of the SL will give us more flexibility in cashflow but the interest rate is almost half of the mortgage rate; paying down even more on the mortgage benefits us in the long run but we’re so far away from being able to pay off the mortgage that we won’t really *feel* the benefit for quite some time. I could always split the difference & do both, but the impact of that will be just “meh” – better than doing nothing, but it feels unfocused. I keep flip flopping back & forth here…and I welcome any advice!

  4. My interest rate for my loans are between 4% and 7% right now I’m pretty sure. Not looking forward to that! I plan on paying it all off before the end of next year.

  5. My graduate student loans are at 6.8%. So, I’m with you that paying high interest rates are definitely a pain in the @$$. That’s why I’m making payments now, even though the loans are in deferment while I’m still in school. However, my wife and I financed our kitchen remodel recently because of the 12 month 0% they offered. We had the money to pay it off, but like you, wanted to keep it liquid and make payments throughout the year. We’ll definitely pay it off by the end of the year, and having the cash has allowed us to feel more secure.

  6. I got lucky and my student loans are in the 2.5% range. That is currently the only interest I pay so I consider that to be high. We just purchased a new car and paid cash. I “loaned” myself the money so my rate is 0% which is about what I want to pay in interest.

  7. From reading this and the comments I can say that I’m really glad that I don’t have student loan debt! WHat a rip off! I tend to think anything over 3% is high, but maybe that’s actually low compared to some of these other rates I’m seeing here!

  8. I’m so glad you pointed out the fact that you had no intentions of investing the money you used to buy a car. I get so sick of hearing people talk about the rate of return they could earn with money they borrow to pay for a house or a car or whatever. I wonder how many of them actually get around to investing this money. And even better, what was their ultimate rate of return on the alleged investment?

  9. “High Interest” to me means an effective interest rate greater than the current taxable yield of TIPS.

    With a mortgage, it is high interest to me, but there is really no alternative except to rent forever.

  10. Sallie Mae was the first of my student loans that I paid off, because it was 6.8% (!!!) interest, and I wasn’t having that. I’ve still got a couple of private student loans that are at 2%, 3.5% and 4.25%. So when I paid off Sallie Mae, I took the money that I would have been putting toward that loan, and started putting it toward the loan with the greatest interest while maintaining minimum payments on all the others. I’m slowly wearing ’em down. I don’t consider the 2/3.5 ones to be “high interest,” but I hate paying ANY interest!

  11. My student loans are costing $1.30 a day in interest (when I started paying off at the beginning of this year, it was 1.45 in interest). Which really isn’t so insanely bad, but again Sallie Mae set my payment such that half the monthly payment goes to interest. I should be happy I have so ‘little’ debt, or that it’s not at a ridiculous rate (4.75%) or that my monthly payment is so low.
    But it hurts. Everyday I think about whether I’ll have a job after the grant I’m on expires and how much should go to my emergency fund in case I’m unemployed, and how much can go to loans (which are at least high enough that it’s clearcut I won’t get a better rate of return on anything else in the relevant timeframe- if they were at 2%, I think I’d be more tempted to put it into an IRA).

    I financed 1/3 of my used car, and that’s the only other debt I’ve ever had. I really liked my credit union, and I *could* pay it off at any point, but wanted the liquidity/credit score boost from having had some kind of a car loan. It didn’t hurt the way this one does, even though I think the interest rate was a smidge higher (5% if I remember correctly).

    So I’d argue there’s something uniquely punch-in-the-faceable about Sallie Mae.

  12. UGH one of my student loans is 8.675%. Such ridiculousness. I got a MA no-interest loan, though, so I’m taking my sweet time paying that one off 😀

  13. I managed to avoid high interest rate loans my entire life. I have excellent credit and demand the lowest rate. If I do not get it, I can go wherever I want. It is all about choices.

  14. The interest rate on my first house back in the 1980s, yeah, that’s right, I’m freakin old, what’s it to ya? So anyway, where was I? oh yeah, the interest rate was 10% and we thought we were getting a great deal because the rate had been as high as 14% for most people we knew. A few years later we refinanced when rates started really getting low. HIGH and LOW is a matter of perspective. You young whipper snappers don’t know how good you have it these days. Now, where’d I put my teeth?

  15. We were raised so that “you save the money first then buy what you need”. With the exception of the mortgage (which we paid off in 8 years) we bought nothing where the bank could get interest money.
    As soon as we bought a car we started saving for the next one, so by the time the current car (bought as used) will need to be replaced (10 years from now), the money for a new car is there.
    I truly believe that if people would plan ahead and save for what they need before buying,they would a lot less clutter in their home and a lot more money in their bank account.

  16. For me right now, anything higher than 5% is high. That’s the avg amount I know I can make back in the stock market which allows me to “offset” the interest charge somewhere. Once a year, I take my investment savings and decide if it should go into the market or my loans based on loan interest rate vs my historical avg in the market.

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