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Do You Know How Much Interest You Are Paying Each Month?

by Ryan Guina

Are you ready to be shocked? Then gather your most recent statement for each loan you have and walk through a short exercise with me. Somewhere on the loan will be a breakdown of how much you borrowed, the amount of your monthly payment, how much of your monthly payment goes toward the principal, and how much interest you are paying on your loan. With this information in hand I want you to make a 4-column chart to record your data (you can use a spreadsheet or paper and pencil; both work great for this exercise).

How much interest are you paying?

It’s one thing to know the interest rate you are paying on your loan, but it takes on an entirely different meaning when you see how much money you are actually paying toward interest each month. In many cases, the final number is shocking! I created an example debt chart to represent loans that a young couple may face shortly after starting their life together. Details about the hypothetical loans follow the chart.

Example debt chart:

Loan Total Payment Principal Interest
Mortgage $900 $200 $700
HELOC $375 $325 $50
Student Loans $184 $166 $18
Auto Loan 1 $368 $312 $56
Auto Loan 2 $250 $215 $35
Credit Card 1 $150 $25 $125
Credit Card 2 $150 $42 $108
Total $2377 $1285 $1092

Almost HALF the loan payments are for interest!

When you look at the numbers it almost doesn’t seem real, but it is – 46% of these payments go straight to the lender in the form of interest. It is amazing to see how much interest is charged on loans, and many people don’t realize how much interest they are paying until they write it down. These numbers are even more difficult to swallow when you realize they are monthly numbers and the annual interest would run over $13,000, which is a substantial percentage of many people’s take home pay.

Of course, each situation is different. For example, the mortgage interest makes up the vast majority of the interest in this chart, but even if you remove it, you would be paying $392 interest on $1477, or roughly 27%.

Hypothetical, but realistic numbers. The loans in this example represent common loans that many young couples face shortly after graduating college, getting married, and starting a family. The numbers used in this example were arrived at by using an amortization schedule calculator for reasonable loans at various stages of repayment to simulate a real world situation.

Loans and interest rates used in this example:

  • Mortgage – 30 years, $150,000 loan @ 6.0% interest after 5 years. Mortgage payment does not include property taxes, insurance or PMI.
  • HELOC – $20,000 @ 5.0% for 5 years after 3 years.
  • Student Loans – $20,000 @ 2.0% for 10 years, after 5 years.
  • Auto Loan 1 - $20,000 @ 4.0% for 60 months; after 1 year.
  • Auto loan  2 – $15,000 loan @ 6.0% interest for 48 months; after 2 years.
  • Credit card 1 – $7,500 @ 20% interest, paying $150 each month with no new charges.
  • Credit Card 2 – $5,000 @ 10% interest, paying $150 each month with no new charges.

How long will it take to pay off your credit card? The example in this article uses a credit card with a $7,500 balance at 20% interest. If you pay $150 per month and don’t make any new charges, it will take you 108 months to pay off your card. That is 9 years! The second credit card bill will take 40 months to repay.

How to reduce the amount of interest you pay

As you can see, paying interest will get you nowhere fast. There are several ways you can reduce the amount of interest you pay each month – and you have already done the first step, which is recognizing how much you are paying. The next step is to stop adding new debt, which means no more credit cards or additional loans.

Following that, you will want to try and negotiate  lower interest rates. You may not be able to do that for fixed rate loans without refinancing the loan (which may cost money or be subjected to other conditions). But you may be able to negotiate lower interest rates on your credit cards or other non-fixed rate loans.

Other options include creating your own do it yourself debt consolidation plan, which may include using a 0% balance transfer credit card to consolidate you credit card debt at 0%, using your HELOC to consolidate your higher interest loans, or consolidating your loans through a peer to peer lending company such as Lending Club or Prosper. These loans allow borrowers to take an unsecured loan to use as they wish. In this case, consolidating debt may be a good way to pay less interest and simplify the repayment process by making fewer payments.

The importance of paying more than the minimum payment

As you can see by this example, paying the minimum on your loans means you are sending a lot of money to the lender each month instead of reducing the principal you are paying. When you make extra payments that money goes straight to the principal, which reduces the amount of money you owe, the interest you owe, and the time it will take to pay off your loan. It’s a win-win situation for you.

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Published or updated November 14, 2009.
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{ 17 comments… read them below or add one }

1 Financial Samurai

Gotta say, it’s shocking and gut wrenching indeed if you sit down and do the calculations! That’s why banks are still in business and making money.

Folks can’t just pay the minimum on CC debt. That’s just not right. Going into debt to buy a depreciating asset like a car? That’s a no, no and why we have the “1/10th rule” for car buying at my site.

I think we’re too afraid to see how much interest we pay, so we don’t. We’d probably get mad, and get more aggressive in paying down debt if we did. Thnx Ryan for highlighting!

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2 Miranda

Now THERE’s something scary for Halloween! Sadly, I am well aware of just how much interest I’m paying. The fact that I get a tax break on it doesn’t make me feel that much better about the whole thing.

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3 Kevin

Not counting my primary mortgage, I pay about $270 a month on interest charges. That is down from the start of the year when I was paying about $315 a month. It’s a lot of money and it adds up over time. But it’s nothing like $1,000 a month. Even with my primary mortgage, it has to about $800 a month tops. That is a lot but it’s also unavoidable right now.

Most of my debt is student loan debt and I am working on paying it down as quickly (and sanely) as possible. It’s a long road but I know there is a light at the end of the tunnel. I can’t imagine how I would survive if I was paying interest on credit card debt. My highest rate is only 8.5% (and that is also my smallest loan and one that will vanish next month if everything goes right)… and I think that is too high. I couldn’t imagine paying 15%+ for a loan… it would kill me.

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4 Ryan

Kevin, Thanks for sharing. It’s good to see you have already been calculating your numbers, so you know where your money is going. It takes awhile, but you are dedicated to repaying your loans and you are making great progress. Stick with it and you will have increased cash flow each month which you can direct toward reducing the rest of your debt. :-)

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5 Craig

Luckily I have no loans other than on my car. So I don’t have a chart like the example, but because of my younger age I have a higher interest rate on my car payments I would like to lower at some point.

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6 Ryan

Craig, As you build your credit history and score you will be able to qualify for lower interest rates. For now just focus on paying this as soon as you can – that way you increase your cash flow for more important things in life. :-)

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7 Ron

Now this is an analysis that makes sense. I’ve never seen anything put quite this way, but outlining how much someone is typically paying in interest each month is genius.

The best bet is to pay off your debts as soon as possible so you can get in the position of *acquiring* interest instead!

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8 Matt Jabs

Whatever you do… do this exercise. It is the single best way to gain the motivation to really start doing something big about your debt.

Feel overwhelmed? Figure out how much money on interest you spend. It will make you mad and will FORCE you to fold your hand or start making a change for the better… a change only you can make!

Solid stuff Ryan… you know I love this exercise! ;-)

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9 Evan

Well you just gave me homework for next week…The horrible part is how sick I will feel when I am done.

Thanks…I think

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10 Ryan

Evan, just use it as motivation to pay your debt off more quickly. :-)

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11 Matt Jabs

Exactly… use the painful knowledge to your advantage. A lot of times we would just rather “not know” because it’s easier. But the sooner we nail this down, the sooner we can turn it around.

Do it man! :-)

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12 Evan

I happened to have a mortgage statement at work and pulled it out. In the Month of June I paid $1,123 in Interest and $135 in Principal UGH and that is just the mortgage debt!

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13 Miss M

I only have a mortgage to worry about, but the interest on it alone is enough to give you a heart attack ~ $1500. I’d like to speed up the payoff, but it’s rather daunting when your looking at a loan balance still well over $300,000.

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14 Ken

OK I’m a little scared to do this ananlysis but I’m sure it would be eye opening.
I’ll get back with you when I get the guts to do it.
Great post!

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15 Broke M.B.A.

What a great and simple exercise. Like a budget, when you sit down and finally take a good look at the numbers, the results can have a drastically positive influence for your financial life.

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16 Jake Stichler

Awesomely enough (or maybe not), the debt snowball spreadsheet I use from vertex42.com shows me exactly how much interest I pay every month, along with a spiffy graph that shows how my interest payments decrease as I progress through my snowball plan.

All together, amongst my $58k of debt, I’m currently slightly over $140/mo in interest payments. It could be a heck of a lot worse (and was!).

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17 Evan

Jake,

I used that same spreadsheet to create my debt snowball, however, that spreadsheet can’t tell you the amount of interest you are paying on your mortgage or car loan(s)…only CCs

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