Read a personal story about getting a loan and gain a better understanding of what's involved.
For the longest time, I could never stand the idea of paying interest. First of all, I wasn't sure I fully understood how all the percentages worked, and mostly, I just felt it was foolish to pay back so much more than the original amount. When my friends started signing up for credit cards, I stuck to my savings and checking. I bought my first car, used of course, with cash that I'd been saving for five years. And while many of my friends started looking into buying homes, I was happily renting an apartment, still never having touched a credit card.
It wasn't until I met my husband, that the topics of interest and loans made their way to the forefront again. I was astounded to learn the Doug had not one, not two, but THREE credit cards and that he was comfortable carrying low balances month to month on all of them. He also owned a small house with a first and second mortgage. I couldn't help but ask him how he could stand to pay all that interest. He was surprised by my question and that's when I had to admit I'd never even had a credit card. As we kept talking, Doug quickly realized how confused and uncomfortable I was with the ideas of interest and loans. What he said next further confused me.
"Sure, I pay several hundred dollars in interest per month, but I get a lot in return for that." He explained that when he'd first started using credit cards, he'd overspent and found himself carrying more debt than he was comfortable with. Still, because he'd always made at least the minimum payment on time for all his cards, he'd built up a fairly good credit rating that allowed him to qualify for the mortgage to purchase his home.
Once in the home, Doug said he worked hard to pay the mortgage and the minimum payments on his credit cards for nine months. At that point, he was able to take out a second mortgage on the home to pay down those credit cards. The home value had increased in those nine months and Doug was able to take out even more than the amount of principal he'd already paid.
I still was not convinced. It seemed to me that Doug had a lot of debt and paid a lot of interest and I couldn't see what he was getting in return for it.
Doug continued to explain that he never would have been able to qualify for the mortgage in the first place if he hadn't used and paid on his credit cards. He needed to build credit to begin with. That credit allowed him to own a home and the equity in that home, in turn, allowed him to pay down his credit cards.
"Carrying low balances on those cards keeps my credit rating high, and that's not even a lot of interest. And all the interest I pay on the first and second mortgage is tax deductible," Doug said. "But the best part," he added, "is that my home has increased in value even more in the two years since I took out my second mortgage. That equity by itself is nearly equal to all the interest I've paid so far."
I was beginning to see his point. It was clear that the credit cards and loans that Doug had used over the years had opened up possibilities for him.
"And," Doug said, "that equity that's been building up is just enough for me to put a down payment on our new home. With that, he pulled a newspaper clipping from his pocket that showed a picture of one of the cutest houses in the neighborhood. I was sold.
A couple months later, Doug and I were moving into our new house. With his excellent credit, Doug had qualified for the mortgage by himself, and I had just opened my first credit card to start building my credit rating. Doug says, in a few months, I should open a new one, but I think I'll take my new appreciation for credit and loans one step at a time.