Purchasing an item using credit often can feel as though the purchase is ‘free’. This,
however, is definitely an illusion. The debt you create costs you more than you anticipate.
All debt has interest. In fact, the higher the interest rate, the higher the amount you’ll pay
for your debt. This also means that the time taken to pay off the debt is longer.
When you borrow money through a loan, or acquire a credit card, there are number of costs
included that add to the expense of the debt.
- Interest. The interest rate can differ and they can depend on factors such as the type
of credit, the repayment term as well as the credit score of the person applying for
credit. Interest rates can also change which means that your repayment cost can be
- Initiation fee. This is a fee that is paid when you sign up for a credit card or take out a
loan. It is only paid once. However, this fee can be large, depending on the amount
of the loan, the type of the loan and the credit provider. While it can be divided up
and paid along with the monthly instalments, it is another factor that adds to the
cost of debt.
- Service fee. For most, if not all types of loans, there is a monthly administration fee.
If a person has more than one loan or credit card, these fees can result in a
substantial amount each month.
- Credit life insurance. Your family could become responsible for settling your debt if
something happened to you and you were unable to continue with the repayments.
This type of insurance can cover your payments should you become unable, due to
death, disability or retrenchment. However, it is an added cost and is paid monthly
along with your monthly repayments.
Regardless of the type of loan or credit you are hoping for, the costs involved usually mean
that you will pay back a far larger amount of money than the original amount of money you
Debt is expensive, and the above shows where the expenses lie.
Speak to One Debt today if you need more information about the cost of debt.