What You Would Know If You Knew About Interest

A friend asked me today, “Is paying $25 a month worth of interest on my student loans enough?”

I cringed.

Sadly, the interest rates tacked onto student debt is what is keeping millions of people living with the burden of debt for years and years. And even worse, the concept of interest isn’t taught in schools (with the exception of a few excellent programs and obvious areas of focus like statistics).

So, how does interest work?

How much you pay or earn on interest depends on these three things:

1) The interest rate
2) The amount of the loan
3) How long it takes to repay

Let’s break it down in simple terms. Say you go to dinner with a friend and your portion is $50. Yes, this is a fancy dinner, but let’s keep it simple. You say, “Hey man, I don’t get paid until Friday” and you guys work out a deal where you’ll pay 5% interest. That means, when you pay him back, you’ll pay $52.50. Not so bad, right?

In simple terms: If you borrow money and the interest rate is 5% a year, it will cost you 5% of the amount borrowed to do so, plus the amount borrowed.

Now, let’s go big:

You take out a loan for $20,000 for your first year of undergrad. The interest rate is 6.5%. (Sidebar here to say that most interest is calculated on a yearly basis, but always be careful to check if that’s the case.) So, this loan is actually going to cost you $21,300 per year – that’s the original amount + 6.5% of that amount. If you’re on a 20 year repayment plan (again, for the sake of simplicity) that loan is going to end up costing you in the ballpark of $40,000.

How did I get to THAT number you ask? Well, if you’re paying $1,300 per year in interest for 20 years, that equals $26,000. Then you have to add in the original loan amount of $20,000. So $20,000 + $26,000 equals $46,000.

However, this number is going to change as your principal amount goes down (that’s the amount you originally borrowed). So instead of $46,000, you might end up paying more like $35,000.

I wish the math wasn’t right, but it is. This is how interest works. In this a very common, very real life scenario, you’ll actually end up paying more in interest than the original amount you borrowed.

There’s a way out. The Chipper team is invested in changing the way we overcome student loan debt because we’ve been there. Our Founder, Tony, graduated with more than $100,000 in debt. It was crippling when his first job paid $35,000 a year.

This is not good, but we can’t wait on debt forgiveness. How interest works isn’t going to change. And while our government policies may change, it likely won’t be in time to help out millennials or Gen Z. With Chipper, you can take your financial future into your own hands. Daily expenses like coffee, lunch, and groceries become tiny chips at this monster on your back. The average Chipper user will save $6,200 over 4 years. That’s not nothing.

Still have questions about how interest works or how to get out of student loan debt? Drop us a line here: content@chipper.app

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