Page 191 - digitalliteracy

9.1 Responsible Borrowing

Let’s face it: Neither scenario is a good one, because either way you are paying back at least
twice the original amount of the loan. Getting a lower interest rate or paying back the loan
more quickly would certainly eliminate a lot of your interest payments. Lengthening the term
of the loan, on the other hand, produces staggering results. Figure 9.1 shows how simple and
compound interest play out over several decades.

Figure 9.1: The effect of simple versus compound interest over time

Understanding how interest rates affect both your savings and your loans is critical to making sound
financial decisions.

Used by permission from Lance Barnard.

In Module 10, we will explore how compound interest works in your favor when you are
investing money. However, when borrowing money, especially in the long term, it can cost
you a lot more money than you realize. Armed with this information, let’s look at how you can
keep the most money in your pocket when taking out student loans.

175
© 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution.

sol82612_09_m09_171-194.indd 175 6/29/16 5:19 PM