High Interest Rates: The True Cost of Credit - Refresh Financial

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High Interest Rates: The True Cost of Credit

high interest rates

Cash is becoming a rarity, even more so as a result of COVID-19. In fact, many businesses are even choosing not to accept cash. We live in a society driven by credit, and all too often with credit, comes high interest rates. Those rates make up the true cost of credit, and will vary depending on your credit score.

What is credit?

Credit is a source of money that you don't yet have, but must pay back. It can come in the form of a credit card, a personal loan, a mortgage or a car loan to name a few. In most cases, your credit history will be taken into consideration before a lender extends any credit. Your credit history, and therefore your credit score, will determine the interest rate you are offered, and if your score is too low, might even mean you are denied for credit.

Your credit history is not only used to determine whether or not you will be given credit. It might also be referenced when you open a bank account, rent a home, or even get a job. The better your credit history, the easier and more affordable all of these become.

Many Canadians have found themselves in a financial rut due to their credit score, and for some, the rut is so big they don’t know how they will ever get out of it and are left permanently unable to build a strong financial future. In some cases, people with very poor credit scores aren't even aware that their credit score is having such a huge adverse effect on their finances because they have never known any different. Whenever they have accessed credit it has come with high interest rates so it has become the norm. They are not aware that lower rates are possible!

How much is that high interest loan costing you?

Let’s look at a few scenarios on the true cost of credit:

Your Mortgage

Mortgage Size: $250,000
Bad Credit Interest Rate: 8%
Monthly Payments: $1,908
Interest Paid over 5 Years: $94,821

Mortgage Size: $250,000
Great Credit Interest Rate: 3%
Monthly Payments: $1,248
Interest Paid over 5 Years: $40,590

Long Term Savings Because of Strong Credit: $54,231

Think of what you could do with an extra $10,846 per year over five years!

Your Car Loan

Car Loan Size: $20,000
Bad Credit Interest Rate: 30%
Monthly Payments: $626
Interest Paid over 5 Years: $17,565

Car Loan Size: $20,000
Great Credit Interest Rate: 5% (usually available through dealership financing)
Monthly Payments: $376
Interest Paid over 5 Years: $2,617

Long Term Savings Because of Strong Credit: $14,948

What makes this example even more costly is when you include the depreciation cost of the vehicle. With bad credit, you would pay $50,000 total for a car only worth around $7,000-$10,000 in five years (just as an example). It's also worth noting that if you have excellent credit, you could even get a vehicle with 0% interest. You would save over $17,000 in interest payments on a $20,000 car loan compared to someone with bad credit.

Your Payday Loan (Eurgh, no one likes to talk about payday loans but we must mention it)

Payday Loan Size: $1,500
Bad Credit Interest Rate: 599% (per year)
Bi-Weekly Payments: $345
Interest Paid over 5 Years: $8,985

Great Credit Interest Rate: 5% (for a bank loan of the same size)
Monthly Payments: $28
Interest Paid over 5 Years: $196

Savings Because of Strong Credit: $8,789

For this reason, you should avoid pay day loans at all costs!

Build your credit score

The above scenarios are jaw dropping examples of how your overall savings, and financial picture, can be dramatically altered with strong credit. If you are considering making a large purchase in the future such as a home or a vehicle, it's worth investing 6-9 months into building your credit score so that you get the best rate possible, potentially saving you thousands of dollars on high interest rates!

Learn about our credit building programs, and apply today for a better financial tomorrow!

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