I saw a post saying that two people left school 23 years ago with a combined debt of 70k. They paid 500 USD monthly for 23 years and still owe 60k.
I’m thoroughly confused. obligatory not from America.
In: Mathematics
A loan is when you are given money up front by some entity (bank usually, or banking group, or government) and you agree to terms on the loan contract to pay back the money, with interest % paid as well. You get money day 1 to fund whatever you are trying to do, entity gets their money back later with the interest as profit, to make losing that money in the short term worth it. There are diff types of loans, but let’s assume it’s amortized so each month you would make a payment and that payment would be partly interest, partly principal.
For a 70k loan, only paying a small $500 per month sounds like they were paying bare minimum. The bare minimum payment is usually just paying the interest owed. If you pay just the interest, you never pay down the principal at all, so the loan is never decreasing. And because it’s never decreasing, the interest earned on the principal stays high.
For example, if they paid $500 per month but $490 was toward the interest and $10 toward the principal… well over 23 years (23 years and 12 payments per year) they would only have chipped into the principal $2,760. So they would still owe 67,240 of principal on the loan, after all those years…
Yeah, those people were idiots. They didn’t understand the loans, and never made an effort to pay well beyond the interest so that they could actually pay down the loan. And because these loans don’t necessarily have hard ending terms and you can’t really default on it, they are likely stuck.
A lot of people sign financial contracts without understanding them. “Omg i paid $500 a month for 23 years! What gives!!!” Well, what gives is that you should have been paying $1,000 per month and you would have really chunked that principal down, and as the principal decreases you end up accruing less interest too so it snowballs until you paid off the debt.
This is like someone racking up CC debt and only paying the minimum due, that’s a good way to go bankrupt in a short time frame, because CC’s have terrible INT% terms
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