On several occasions I see comments of the type, “In 4 years my housing credit only lowered 7,000 euros and paid a benefit of 500 euros per month. How is it possible? I already paid 24 000 euros !!! “.
Most people count the total amount of the benefit in their family budget. However, we would be shocked if we knew how much interest we paid each month. It is certain that the interest is the cost of the anticipation of the consumption or of a necessity, nevertheless, that cost is not always accounted in the moment to request the credit.
So that you have a perception of the true cost of credit every month we will consider different types of credit with average interest rates and evaluate how much each month pays interest. I propose that you do the same for yours. Gather all the extracts referring to the credit you support monthly and check which portion of interest you pay in each installment.
What is the Interest Rate on Your Credit
As an example we have 4 types of credit, namely housing credit, car credit, personal credit and credit card. Despite being an example, many families accumulate these types of credits.
- Mortgage Loan: 100,000 euros for 360 months | Interest rate: Eur6m + 2,50%;
- Car Credit: 25,000 euros for 60 months | Interest rate: Eur6m + 7.50%;
- Consumer Credit: 2,500 euros for 24 months | Interest rate: 14%;
- Credit Card: Minimum payment equal to 10% of the debt | Amount: € 1,000 | Interest rate: 18%.
As you can see the weight of interest in the monthly budget of our example, it amounts to 47% of the total payment of benefits, that is, for every 100 euros of benefits, 47 euros is payment in the form of interest to the bank and the remaining 53 euros is capital amortization. This greatness can impress those less attentive to the weight of credit in the monthly budgets.
It should also be noted that the main contribution of interest is via mortgage credit , and the first installments of this type of credit absorb more than 70% of the value of the installment in the form of interest. This scenario explains why the question arises in the first paragraph of this article.
Despite the weight of interest on housing loans, we can not separate from other types of credit, as interest rates are much higher than interest rates on housing loans.
For example, opting for partial payment of the credit card or even the minimum payment of the same represents an incredible overall weight, since the interest rate of credit cards are around 18% on average. Our example for the minimum payment would take more than 76 months to settle a simple account of 1,000 euros and would give the bank more than 170 euros of interest. It’s a brilliant business.
What to Do to Reduce the Interest Weight on Your Credit
After hiring the credit only the renegotiation of the conditions will allow an interest savings. A popular way to reduce interest is to request a review of the interest rate, however, this type of procedure has already borne fruit in the past. Currently banks are unreceptive trading low in lending rates and when they do ask counterparts that may weigh on the client’s budget, such as underwriting insurance or membership of a credit card.
One way to reduce the weight of interest in global terms is to make early partial repayments, eliminating the interest payable on the amortized capital. The legislation allows this procedure to be carried out with some protection, preventing banks from charging commissions.
Regardless of the form used to reduce the weight of interest, there is no better suggestion than to avoid contracting more credit at all costs, either through individual credit or through easy credit mechanisms such as bank overdrafts or credit cards.
Be Responsible use of credit
The responsible use of credit should be made aware of the weight of the credit and of how much money the present will have to waste to satisfy the desires of the future. Note that forgetting the importance of a healthy family budget and ignoring the basic rules of saving certainly will have bad experiences. Over-indebtedness and financial problems are too serious!