3 Ways Debt Costs You Other Than Interest

by Miranda Marquit · 2 comments

debt and interest
Taking on debt really seems like a great idea: You can make a purchase you might not otherwise be able to afford, and you can pay it off in small increments. Even though you are paying interest, the inconvenience seems to be worth it, since you can have what you want now.

But are you thinking of all the ways debt is affecting you?

Interest – paying someone else for the privilege of borrowing money – might be the most obvious cost associated with debt, but there are other costs too:

debt costs1. Lost Opportunity

Few of us think of the costs associated with lost opportunity. However, debt carries with it a lost opportunity cost. When you have to repay debt, with interest, you can’t direct your resources elsewhere. With debt hanging over you, you might not have the money to accomplish other goals, or take advantage of money opportunities that come your way. This can cost far more in the future than the short-term gratification that comes with being able to buy something on credit immediately.

Consider: What if, instead of paying interest each month, you were able to invest the money in the stock market? You would be able to build up a portfolio over time that would allow you to create an income stream that would benefit you for years? The time you miss cannot be replaced. Instead of the opportunity to compound interest in your favor, you are instead paying compound interest.

David’s Note: Not deciding to go into debt turned out to be a life changing experience for our family. It was 2007 when we almost bought our first home. Emotions were high, but we decided to back out of the purchase at the last minute. Obviously the financial crisis happened shortly after, but the real game changer was that I was able to make the leap from an well paid employee to work on MoneyNing.com full time. I saw the opportunity to build MoneyNing.com into something much bigger around 2008, but I only had the confidence to quit my day job because I had no debt, and therefore low expenses. The result after a decade is that I’m way ahead financially than if I stayed as an employee, all while helping other people do the same. Having low expenses means freedom, and in my chance, it also meant more income.

2. Emotional Stress

Money can cause a great deal of emotional stress, and anxiety related to money is often strongest when associated with debt. Worry about paying down debt and how you will meet your obligations can cause true emotional problems and fatigue. Not only that, but the emotional strains can cause difficulties in your relationships. It is hard to maintain good relations with your family and friends when anxiety and emotional stress are wearing you down. When constant debt is a worry, it can color aspects of your life, preventing your from sleeping enough and eating right — leading to health problems that can in turn cost more.

3. Your Credit

Carrying debt can also start to erode your credit rating. Indeed, if you have a high debt to income ratio, it will affect your credit score. If your debt problem becomes severe enough that you start paying late, and missing payments, your credit history will be affected further. It is vital that you consider the costs of having poor credit. A negative credit report can affect the following areas of your life and finances:

  • Insurance premiums
  • Ability to get a job
  • Ability to buy a home
  • Ability to buy a car
  • Security deposit on a rental
  • Service provider (cell phone and TV) transactions

Poor credit can mean higher insurance premiums, and hurt your chances to qualify for a mortgage to buy a home. Some employers look at your credit report, and may decide to hire someone with a better financial reputation.

Bottom Line

There are costs beyond interest payments that come with debt. You might find yourself paying in lost opportunity, emotional strain and lower credit. Before you borrow, carefully consider your motivations, and think about whether you are getting a true benefit — or simply wasting money.

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  • Arminius Aurelius says:

    There are two kinds of debt :
    # 1. Buy the latest gadget that you really want but do not need , smart phone , large screen T.V. , a new car , some electronic gadget …….all start to lose value starting the day you buy it. By buying on credit , 18 % to 20 % interest , it could easily increase your cost by 30 % Money thrown out.
    # 2. Buy [ invest ] in a rental property , your tenants pay off your mortgage and it gains in value over the years .
    Buy shares of stock in an A – 1 company but I personally wait until a market crash and when everyone is selling and drives the price down , I jump in and buy for pennies on the dollar . Buy LOW , sell HIGH .
    Do your research first to make sure it is a highly rated company . Penny stocks are for suckers , one or two out of a thousand , you might make a killing.
    Beware of ” Financial Advisors ” who promote Annuities , they grab a BIG chunk of your money right off of the top .

  • Eric N. says:

    Absolutely agree with this with the opportunity cost being the hardest part to stomach. Looking through my current debt, all I can think about is how much I could be saving or investing if I wasn’t paying so much to banks for things from the past…

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