This chart shows the total cost of borrowing $20,000 at various interest rates and repayment periods.
Interest Rate
5-Year Loan
10-Year Loan
15-Year Loan
30-Year Loan
3%
$21,540
$23,160
$24,840
$30,240
4%
$22,080
$24,240
$26,640
$34,200
5%
$22,620
$25,440
$28,440
$38,520
6%
$23,220
$26,640
$30,420
$43,200
7%
$23,760
$27,840
$32,400
$47,880
As you can see, borrowing can be costly, especially if you take out a long-term loan. It is important to look at other alternatives to borrowing before making a final decision.
Before you borrow, you should compare the after-tax interest rate you are earning on your assets to the after-tax interest rate you will have to pay to borrow money. For example, suppose you have the $20,000 you need in a savings account earning 1% interest. After paying taxes on your interest (e.g., at a rate of 25%), you are really earning an after-tax rate of 0.75%. Unless you can borrow money at an after-tax rate below 0.75%, you'd be better off using the money in your savings account (unless it is your emergency fund). See the following illustration of how this after-tax interest rate is arrived at.
a) Current Interest Rate
1.0%
b) Marginal Tax Rate
25.0%
c) Multiply (a) times (b)
.25%
d) After-Tax Rate of Return Subtract: (a) minus (c)
FINRA SIPC Securities and insurance products are offered through INFINEX INVESTMENTS INC. and its affiliates, member FINRA/SIPC. Infinex Investments Inc. and Exchange Investment Services, Inc. are independent entities.
Not FDIC Insured | Not Bank Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank Deposit
This site is designed for U.S. residents only. The services offered within this site are available exclusively through our U.S. registered representatives. Infinex Investments Inc. registered representatives may only conduct business with residents of the states for which they are properly registered. Please note that not all the investments and services mentioned are available in every state.