More For Your Money - University of Illinois Extension

Credit Uses Future Income

Buying on credit gives you the use of goods and services before you have to pay for them. However, it is important to remember that credit is not free. Buying “on time” means paying charges and interest on your payments. These costs can add up quickly.

The cost of the interest charged on a loan must be told to you. The Annual Percentage Rate (APR) tells you the annual interest rate of the loan. You can use the APR to compare the cost of one loan versus another.

The APR is the yearly charge for the money you borrow. For example, let’s say a lender loans you a $1,000 at an APR of 7 percent. To figure out the cost of the loan for the year, multiply the amount (principal) of the loan ($1,000) by the annual percentage rate (0.07). The annual cost is $70.

Loan Amount X APR = Annual Fee
        $1,000  X  .07 = $70

Comparing interest rates before you buy on credit can result in big savings.  A monthly payment at a higher interest rate may not seem much more than a monthly payment at a lower interest rate, but there can be a big difference in the total cost of the item.


Take a look at this example.

Jorge wants to buy a car. He has saved $500 for a down payment.

Car 1: The car he likes at one car dealer will cost $8000. He can get a four-year loan at the standard used car interest rate of 9.84%.

Car 2: A similar car at another dealer will also cost $8000. This dealer will finance the car for four years at 24% interest.

  Car 1 Car 2
Car cost $ 8,000.00 $ 8,000.00
Down payment $ 500.00 $ 500.00
Interest rate 9.84% 24%
Monthly payment $ 202.28 $ 260.00
Yearly payment (monthly payment x 12) $ 2,427.36 $ 3,120.00
4–year total cost (yearly payment x 4) $ 9,709.44 $ 12,480.00
  1. What is the difference in monthly payment between Car 1 and Car 2?
  2. What is the difference in the total cost of the cars?
  3. Which car should Jorge buy?

It is wise to shop around for the best terms by comparing the annual percentage rates (APRs). You should find out exactly how much using credit is going to cost and be sure that you understand the contract before signing it. A signed contract is a legal document.

Do you have a loan, credit card, or installment payments?  Would you like to figure out how much total interest you are paying?  Go to Debt Management and see the example on power paying your debts.

With Power Payments, you pay the same amount of money towards your debt each month until all your debts are paid. Once one debt is paid, you use the money you spent each month on it to pay towards another debt. The calculators at this website can help you see how this can help pay off your debts quickly.

Go to the web site: PowerPay to enter in your own information.  You will need to know the balance, minimum payment, and interest rate for each of your credit debts.