Debt is one of the big issues that keeps most people from living their financial dreams. It simply limits options. You can’t do as much with your own money if part of it (or most of it) is already earmarked for someone else. That is the true cost of debt.
Literal Cost of Debt
The first way to measure the cost of debt is to look at how much it is costing you in terms of dollars and cents. Financing items like homes, cars, and furniture using debt can force you to pay substantially more than the true cost of the item. If you want to determine exactly how much debt payments are costing you, then you need to look at the total dollar amount of interest that you will have to repay over the term of the loan. The principal would have to be paid regardless, but you could avoid paying at least some of the interest costs.
How much is debt interest costing you? You would be surprised to learn about how much money you are spending just in interest payments alone. For example, a homeowner could easily wind up paying three times the amount of a home’s original purchase price over 30 years. Financing a car over five years could force an auto purchaser to pay one and a half times the real purchase price. Relying on credit cards for survival could force you to pay back double your actual balance in interest every few years. You could spend hundreds of thousands of dollars over your life just in interest for borrowed money.
If my husband and I had simply stayed on our payment schedule for our 15 year mortgage, we would have paid $42,000 in interest for a $92,000 loan. And that would have made us some of the lucky ones. Instead we have always made additional principal payments and “only” will spending $20,000 in interest and should own our house outright in 10 years or less from our original purchase date. That is not bragging – that is just math. Could we possibly make a better return on our money elsewhere? Yes, but this is guaranteed and we also invest a bunch every month anyway. I like to have my cake and eat it too.
Opportunity Cost of Debt
Debt has other costs that cannot be measured in financial terms such as the time that you have to spend trying to get out of debt. You could be forced to work more hours than you wish in order to make debt payments. The cost of debt can also be seen in added stress and anxiety. Debt can force you to postpone pursuing your dreams because you cannot afford to do what you love. Bill payments can force you to postpone retirement too. Debt could really be robbing you of valuable time that could be spent with the family and friends.
In short, the cost of debt can be measured in dollars or in the most priceless commodity of all – time.
What is the cost of debt in your opinion?