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Tuesday, March 28, 2017

Are Debt Payments Too Low?

Posted by Tim Stobbs on September 27, 2012

After recently buying my new car, I admit I actually didn’t know how much my minimum payment would be on my line of credit that I used to pay for it.  So I just got the statement yesterday and I was shocked on how low the minimum payment was: $50 per monthPardon?!? Did someone screw up the math on this one?  At that low of a minimum payment I’m not even covering the interest each year.  If someone kept doing that you would never pay it off.

So what’s the problem here?  Well I suspect the issue is when my line of credit was setup in the first place I didn’t pay much attention to the payment options and the bank checked off the option of interest payment only.  Because I only borrowed the money for half a month I haven’t actually hit the full amount over $50, so hence the insanely low minimum payment for the first half month.  Next month I will likely owe at least the interest due or just over $60.

Yet with such low payments it becomes easy for people to think that a payment of like $100 month would be ok.  When in fact that low of a monthly payment it will take 23 years to pay off my car.  Sort of defeats the purpose of the loan if the asset I bought with is long gone before I pay off the debt.  What happens if the minimum payment is pushed up to 1% of the balance or $185 a month? In that case the loan is paid off in just over 9 years.

The fact I can choose interest only payments is rather insane to me.  Granted I’m a responsible borrower, but it would be nice for the government to look out for people that don’t think about money as much as I do.  After all with all these warnings about our debt, it would be nice for the government to suggest something simple.  Change the line of credit rules to make all minimum line of credit at least 1% of current balance.  Yes that would drive up a LOT of people’s payments, but in fact it might cause some of us to at least think a tiny bit more about what we can afford.

So what do you think?  Should minimum payments for debts be higher?  Or is that turning us into a ‘nanny state’?

 

Comments

14 Responses to “Are Debt Payments Too Low?”
  1. greg says:

    “Should minimum payments for debts be higher? Or is that turning us into a ‘nanny state’?” – yes and yes. Most people have relative 4 year-old skills with finance, so I’d say they’re still in the point where they’d benefit from a nanny.

    Maybe allow taking a test to do otherwise? But being transparent about calculations is always a good thing even without a nanny =)

  2. Steve says:

    Our credit card statements says if we make the minimum payments, we will never pay off the balance. Pretty scary!

    I think there is only so much society can do to protect the oblivious. If you need to burn yourself to learn that fire is hot, perhaps people need to become bankrupt and have horrible credit because they don’t know how credit works or perhaps can never be trusted with it.

  3. Tara says:

    I think there should be no minimum payments below 3%… people are often clueless and need the govt to protect them from their own stupidity.

  4. lorain says:

    ugggg….
    I hate, HATE, the idea of the government having to protect us from our own stupidity!!
    To me that’s pointing fingers. We all need to take responsiblity for our own actions.
    Rant over

  5. Steve says:

    I’m with Steve & Lorain.

    You can’t legislate common sense.

    It’s not the government’s responsibility to keep me from doing someone foolish. It’s mine. And if I’m foolish enough to pay just the minimum balance for 20 years then I should suffer the consequences.

  6. Simon Pickard says:

    Sounds like an amazing deal!
    Keep paying the $50. Let inflation take care of the rest. Why the hell are you trying to pay off crazy cheap money? Buy 100 cars, sell them, invest that cash and keep paying back their $50 each if they want to be so dumb.

  7. Well, if the payments are so low that you never pay it back, that’s pretty good no? I’d like that. As long as the interest is low.

  8. bob dole says:

    Who cares?! Really. What a dumb topic.

    Government rescue? Equally dumb.

    Who here voted for Harper?

    This is your corporate state. Enjoy it.

    Economic feudalism. Get used to it.

  9. Donna Ross says:

    I agree. Grow up. It is time we got back to personal responsibility. I am so tired of the “I didn’t know” or “they didn’t tell me” excuses. That said, I think we should get back to teaching basic math life skills in Elementary school. Shees. Rant over. :0)

  10. Pat says:

    Biggest shock here is – you bought a new car on credit?
    Seems to me that issue with this post.

  11. Steve says:

    Chuckle . . . Pat – once I have the cash to pay for it outright – the next time I buy a car I would love it if the dealership let me pay for the entire purchase with a credit card – that seems like an easy way to get some miles/points/cashback on a purchase . . .

  12. dlm says:

    “It’s not the government’s responsibility to keep me from doing someone foolish.”

    It is the government’s responsibility to keep the banks’ greed in check.

  13. Tim Stobbs says:

    @Pat,

    I wasn’t planning on buying the new car until late 2013 or even 2014, which is why the entire purchase went on credit. I was planning to save for that after the mortgage was paid off by the end of Oct 2012.

    @dlm,

    Now that is a good point. While most people are all for personal responsibility, this I think perhaps the banks are the more interesting issue. As a shareholder I want the banks to do well, but as we have seen reckless banking can also be destructive (aka US house collapse). There is a need for some regulation on the banks, but is it enough or do we need any more is a good question.

    Tim

  14. Manda-B says:

    I think that changing the default option to one that pays down principal would be a great start. People would still have a choice to change their payment option, just the starting point of that decision is different. I liken this to companies (including the one I work for) defaulting people into the 401k plan rather than defaulting them out after studies showed that this greatly increased participation as most do not choose to change from the default option.

    One thing to keep in mind is that this would probably change the amount of money the bank was willing to lend if they have to qualify people under a higher minimum payment.

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