We often think about credit card whenever we talk about minimum payments. But a lot of loans also come with minimum payment terms that lower down your defences. The basic idea behind it is that you do not have to pay the full amount due when a payment is due. Instead, you will only need to pay a minimum amount to avoid falling into default.
On the surface, it can look like a very consumer friendly term. But in reality, the balance that you do not pay off will compound the interest you have to pay unless the terms of the credit facility states otherwise. Meaning your debt can actually grow if the interest charges are more than the minimum payment. This grows your debt without needing you to borrow more. This is brilliant business isn’t it?
The appalling thing that is many people go the route of making minimum payments leaving the thought of full repayment for another day. They kick the can down the road to manage the problem in future. Doing this fundamentally goes against the grain of debt repayment. You are in essence avoiding short term pain while looking at long term financial disaster. One day, you will wake up from bed and think why the hell you are in such a predicament.
If the moment your swipe a credit card, is a moment that you think about the minimum payment, you might already know that you have a problem. You could be buying things from retail therapy that you cannot afford. And if the moment you receive your credit card statement, you look for the minimum sum instead of the outstanding balance, you will surely know that you are slowly digging a hole you might fall into in future.
The other thing you must acknowledge is that banks and card issuers are profit-driven entities. They exist for the purpose of generating profits for demanding shareholders. So the least you can expect from lender when they offer you such attractive looking terms is because the terms are attractive to them as well. In a way, they could be hoping that you do not repay your debt at all. This is so that they can continue to charge you penalty fees while your interests owning is compounding to the heavens.
Imagine a late payment charge of $50 for a payment worth $500. That is an immediate 10% return for absolutely no additional capital. That payment does not reduce your principle or reduce your monthly installments. They are just an additional revenue for the lender. You will eventually have to return the money you borrowed in the first place. So why be late and incur these extra expenses. These extra money could very well be used to pay down some of your other liabilities.
A few reasons why people make late payments include send checks by mail. By the time it reaches the bank, it could be already past due date. Or the common mistake of treating weekends and holidays like actual business days. Lenders will not be able to process on these days as they are not operating. But do note that internet banking have change this landscape considerably in recent years.
Avoid getting into these situations where the odds are against you. You have so much time to make your payments without having to beat the deadline. Take debt repayment as a responsibility instead of something you have to do for the sake of it. After all, you did accept a loan voluntarily.