This YouTube video explains what interest rates are, contrasts simple vs. compound interest with numeric examples (100 at 10% simple vs. compounded annually), and gives a personal anecdote about buying a Jeep Compass in April 2020 to show how long-term car financing dramatically increases total interest paid (example: $42,000 ticket becomes ~$57,000 at 3.9% over eight years). The creator warns that lenders distract consumers with low headline rates and urges viewers to consider compounding's long-term cost or benefit.
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36% interest. Is your mind blown by that? Because it really should be. They're not deceiving you in any way, they're just distracting you from the big picture. Hey you. I hear that you've been asking what interest rates are and how they work. Well, let me take a little bit of time to tell you. Interest rates are like a price tag on money. You know when you go shopping and you look at the price tag to see how much something costs. Well, interest rates are like that for borrowing or lending money. Now imagine you want to borrow some money from a bank to buy a fancy new car. Now, the bank will lend you money, but not for free, of course. They will apply a cost to lending you that money, which is interest. Now the interest rate is a percentage of the borrowed amount that, that you will have to pay back over and above the amount you borrowed as a fee. Interest. Interest rates change. Sometimes they're high, sometimes they're low, and sometimes they fluctuate like a roller coaster. They go up and down. They go up and down. Now this is influenced by a bunch of factors. You know how the weather affects your mood. Well, the economy has a similar effect on interest rates. When the economy is booming and things are going well, interest rates tend to be higher because there's a lot of demand for borrowing money. Now, when the economy is not doing so well, and it's kind of sad, interest rates go down to encourage you to borrow money to stimulate the economy. There are two types of interest, and those are simple interest and compound interest. Simple interest is like the vanilla ice cream of interest rates. It's a straightforward calculation. So let's say you borrow $100 from a bank and the simple interest is 10% and you plan on paying this money back over a five year period. The interest is simply, pardon the pun, calculated by taking $100 times the interest rate. That is how much interest you're paying for year one, for year two, for year three, for year four, year five. So let's say for this example, you're borrowing $100 at 10% interest. After the first year, you've paid $10 in interest. After the second year, you've paid another $10 in interest. So over five years you've paid $50 in interest. Now with compound interest, this is like a double scoop of vanilla ice cream. It's interest on top of interest. So you borrow that same $100 from the bank at 10% interest and it's compounded annually. In this case, for this example, keep in mind that compound Interest can be calculated based on the institution you borrow it from in different ways and they determine what that is daily, monthly, biannually, annually, whatever that looks like. But for this example, we are compounding the interest annually. So you take that $100 after year one at 10%, you owe 110, same as the simple interest. Correct after year one. But now here's where things change moving forward. For year two, you are now charged that 10% interest on that $110. Now at the end of year two, you're charged interest, another 10% interest on that $121. Now fast forward to five years when you've paid it all back. You've actually paid back $161. Now you can see with simple interest, you paid back $150. With compound interest, you've paid back $161. So you can see the power of compounding. Now, to give you a personal example of a loan that I got, I bought a brand new Jeep Compass in April of 2020. I was on the lookout for a small SUV and I did my homework. I looked around to see what the best interest rates were. It turns out that I got this and I went to the dealership to look at a Jeep Compass. The best interest rate at that time was 3.9%. I shopped around. Now, as a human race, what we do is we tend to focus on numbers. We tend to focus on the most attractive looking numbers. And this is what I did. This is what I'm guilty of. Knowing what I know now, I probably would have done things a little bit differently. So they had a deal going on at the time for 3.9% financing, which at that time was not a bad deal. Now, shame on me. But I chose 8 years to pay back my car loan because what was I doing? I was focusing on the attractive low number. The longer you extend the repayment plan of that loan, the smaller your payments are. But volume wise in interest, I paid way more in interest than I would have if I would have got it for 48 months or 60 months. They're not deceiving you in any way. They're just distracting you from the big picture. They're having you focus on, hey, it's only 3.9% financing. Your payments are only going to be $275 every two weeks. So for me, manageable, okay? Yep, I can do $275 every two weeks. But now that I know what I know and I look and I see what I'm going to actually have paid for that vehicle at the end of the road. The ticket price was $42,000. The interest rate was 3.9%. Financing compounded interest. Of course, I will have paid $57,000 for my Jeep when it's all said and done. That's $15,000 in interest alone. 36% interest. Is your mind blown by that? Because it really should be. Now, compounding can be very powerful and you need to be careful when it's working against you to avoid getting into too much debt and causing yourself financial stress. Now, compounding can be wonderful, but when it's working in your favor, by putting your money in a vessel that's working for you now, we can coach you on how to improve your financial situation. Compounding your money and using your own system over time to finance the things you want in life. Keeping that money within your own family instead of having it flow away from you into somebody else's bank. Now, I know I spent this time explaining interest rates and how they work and the importance of them. But now I'm going to direct you to a video below where a couple of my teammates will talk to you about how interest means nothing. Are you intrigued? If so, click on the link below to gain more insight on how you can take over the control of the flow of your hard earned money.
