Suzanne recently lost $50,000 because she didn’t understand that when it comes to interest, a little is a lot. If you borrow money from a financial institution, you agree to pay a fee, called interest, for the use of its cash. The lower the interest rate, the less money the borrower pays back to the lender.
The majority of personal debt falls into two categories:
- Credit cards
- Mortgages
Credit cards carry the highest interest rate - more than 30 percent in some cases. If minimum payments are made, that unbeatable deal almost doubles in cost in three short years. Many consumers fall into the “enjoy now, pay waaaay later” trap. Save by foregoing award points in favour of a lower interest rate. A card with 10% instead of 30% interest on a $1,000 debt means an extra $200 at year’s end - enough for those shoes you love or half of a weekend in Vegas!
Mortgages have lower interest rates, but the sheer size of the loan and the length of time it takes to pay it back means that even a small change can be a big saving. When Suzanne found her ideal loft apartment in Toronto her bank lent her $200,000 at 5.5% to be paid back (amortized over 25 years). By the time she finishes paying off her loan, she will hand over $168,000 in interest.
Suzanne went to her bank because she thought that, based on the existing relationship, they'd give the best deal. What she didn’t understand is that her banker only has access to the bank’s mortgages. Given Suzanne's credit rating, a mortgage broker, who has access to dozens of lending companies, could have saved her 1.5% in interest. That may not sound like much. But a mortgage interest rate of 4% (amortized over 25 years) means that Suzanne pays $116,700 in interest—a saving of over $51,000 on the 5.5% mortgage her bank gave her.
Take the time to comparison shop when it comes to credit cards and mortgage rates. Don’t be shy about asking for lower interest. At worse, the lender will say no. At best, you can save thousands of dollars.
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