Every Penny Counts
by Scott Bilker
How many times have you walked out into the parking lot of a supermarket and spotted a penny on the ground? Plenty of times no doubt. You might bend over to pick one up if you see Lincoln staring at you, but for the most part, you just keep walking by.
I mean, after all, with the cost of inflation over the years, what is a penny worth? It really isn't worth that much as far as buying something tangible like a television, is it? What's a penny going to add toward that purchase (besides one cent)?
I remember when, for a penny, you could get a gumball. My father can remember going to the movies for pennies. Now people leave their pennies at the counter of the convenience store to help the next person balance their transaction. And why? So they don't have to get any pennies in their change! My point is that the penny doesn't seem to have much value, but it certainly has value when you're dealing with your loans.
When it comes to debt repayment, a penny can mean a lot. Applying one extra cent to each payment can make a significant difference in how much you repay over time. Let's walk through an example that clearly demonstrates exactly how valuable the penny can be.
The example loan is $10,000 at 18% and you're making monthly payments of $150.
Question: How long does it take to repay this loan?
Answer: You can never repay that loan by making payments of $150 per month. No matter how many payments you make, you will always owe $10,000. Why? The amount of monthly interest is exactly equal to how much you're paying. That monthly interest fee is $150 ($10,000 x 0.18/12). You'll never owe any more than $10,000, but you'll never be able to pay off the loan.
Next question: What happens if you add just one penny to that payment? Just one cent? That's right, now the payment becomes a big $150.01. Now how long will it take to pay back that loan?
Answer: It takes 53 years, 10 months! Okay, that's a lifetime for some people, or at least half a lifetime. Now, because of that one penny, instead of paying $150 for eternity, the loan is eventually paid off.
Okay, so you don't want to be in debt for almost 54 years. What can you do? You guessed it. Add another penny. So here's the next question:
Question: How much do you save by making payments of $150.02?
Answer: It now takes exactly 50 years to pay back the loan! That extra penny knocked almost 4 years off the payback time of the loan. How much money did that extra penny save? Let's see. The out-of-pocket cost of the first loan is $150.01 for 53 years, 10 months. That comes to a total repayment of $96,884.72 (the last payment is less than $150.01).
With the extra penny, payments of $150.02 for 50 years, it costs a total of $89,907.69. That's a savings of $6,977.03! Quite a bit saved just for adding a single penny.
Think about this. By increasing the payment from $150.01 to $150.02, you are adding one cent for 50 years. Well, 50 years is 600 months (600 extra pennies) or an out-of-pocket increase of just $6 over the course of that time in order to save $6,977.03 in the end. I think that's pretty neat.
Okay, I hear the arguments mounting. "But Scott, that's a crazy example, who's really going to get a loan for 54 years?"
My answer is that many people are doing it right now! How? By making the minimum payment each month. If you charge $8,000 on a credit card at 19.8% APR (annual percentage rate) and continuously make the minimum payment, it takes 54 years to pay it back!
Remember, the bottom line is the more you can pay back, early on, the more you can save in the end. So the next time you see a penny laying in the road somewhere, you may want to think twice before passing it by.
Scott Bilker is the founder of DebtSmart.com and the author of Talk Your Way Out of Credit Card Debt!, Credit Card and Debt Management, and How to Be More Credit Card and Debt Smart. Send your questions about money, credit, loans, mortgages, or debt to him at: Scott Bilker, PO Box 563, Barnegat, NJ 08005-0563 or online at debtsmart.com/askscott
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