October 27, 2025 • 29 mins
Debt seems normal—but the real cost is anything but. In this eye-opening episode, Paul breaks down how interest, minimum payments, and long loan terms quietly drain your future and steal opportunities you didn’t even realize you lost. Learn how to see debt for what it truly is, make smarter decisions, and take practical steps toward lasting financial freedom.
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(00:00):
Paul, Welcome to Catholic moneytalk, where we talk about all
things money and finance, and wetry to do it through a lens of
being Catholic, where ourultimate goal is to one day be
in Heaven with the Lord. I amyour host. Paul Scarfone, thank
you for being here today.
Welcome back to Catholic moneytalk. Today, I want to talk
(00:23):
about the true cost of debt.
What borrowing really costs you,and we're going to dive into
that. But before we do, let'ssay a prayer in the name of the
Father and of the Son and of theHoly Spirit. Amen, Heavenly
Father. We thank you for thisday. We thank you for all the
ways that you love and bless us.
Lord, we know that you have anawesome plan for us. Just fill
(00:44):
us with your Holy Spirit. Giveus a great desire to pursue your
will in our lives, Come HolySpirit. We ask all this in Jesus
name, amen, in the name of theFather and of the Son and of the
Holy Spirit, Amen. So the truecost of debt? What borrowing
really costs you? Wow, that is amouthful. Well, this is
(01:08):
something I talk about a lot,but very clearly it hit me last
week when I was teaching thehigh schoolers and my kids
school, the watching their faceand the aha moments as we spoke
about the full cost of debt,right? The payments, the
(01:31):
interest over time, and thatdoesn't really even factor into
the lost opportunities of whatwe could be doing with that
money. So I want to talk aboutthat because the the looks on
the faces of those kids told mevery clearly that, you know,
forget about just teachingpersonal finance that message
the true cost of what debt isright the but what borrowing
(01:54):
really costs us is not hammeredhome enough to most of us and
and how do we know that? Well,we know that debt is normal.
It's probably one of the mostnormal things. So here's some
stats how the average householdhas an AV in the US has an
(02:17):
average credit card debt, justover $6,000 okay, in the US, the
average household debt, and thisis all types of debt, is over
100,000 we spoke recently aboutthe car payments, the average
car payment in the US, averagemonthly payment for used cars is
(02:42):
$521 for new cars, the averagemonthly payment is $745
a month. Like these are big, bignumbers, and sometimes we just
hear those numbers. This is thenormal part. We hear those
numbers. We look at our income,right? For those people who have
(03:03):
debt, they look at their incomeand they think, can I afford
that payment? And that's allthey're looking at, right?
They're just looking at thepayment amount. So the activity
I did with the kids the otherday was I, we, I give them
scenarios, right? So last week,scenario was meet Jose and
(03:25):
Sally, and I just give them twodifferent scenarios, basically,
word problems. Jose justgraduated from college. He makes
this much money. He has a carpayment, he has a student loan
payment. He's looking for aplace to rent, build his budget
for him, right? And and I givethe kids those kind of word
problems, because math in lifeis actually word problems,
(03:46):
right? It's real life situationsthat we have to figure out. And
sometimes there's some basicmath involved. But the normal
part of debt is we look at, oh,can I afford that payment?
Right? I've got a friend. Theyjust, I believe they closed on a
house today, which is veryexciting, you know, they go to
the bank, and the bank says youcan make a payment up to say,
(04:07):
you know, you can borrow moneyto have a mortgage up to a
certain amount of money, andthat's based on the mortgage
company did math, based on theirbudget, and what the bank thinks
they could afford As a monthlypayment and then using the
interest rate and stuff you backinto how much they could
possibly borrow. But as peoplethat are responsible for
(04:29):
everything the Lord has given tous, including our money and the
ability to earn it right, theLord asks us to steward these
things properly. We don't wantto kind of relinquish our
decision making to the bankwho's trying to sell us a
mortgage. Rather, we shouldcalculate how much we think we
should spend on our home, and ifwe're going to get a loan to buy
(04:50):
it, then figure out what's a 15year or 30 year, what's the most
reasonable, prudent option sothat we're managing our money.
Well, and we pray about thesethings, and we see where the
Lord's telling us, it's not justmath, right? And the normal part
of debt is we want this.
Everyone seems to be borrowing.
(05:11):
I think it was like 80% ofhouseholds have debt in the US.
That's a variety kind variety ofkinds of debt, but the most
normal ones outside of amortgage, are going to be the
top three, I would say, arecredit card debt, student loans
and car payments, right? Thoseare the the that's like the
(05:33):
trifecta of burying yourselfunder a life of payments. So
it's very, very normal. So whatwe want to understand is how
much it actually costs us, notjust the monthly payment. And in
order to do that, we need tounderstand how interest works,
and then what, what do we needto avoid? And how do we pay
(05:54):
these off smartly? So I'm goingto just give you quick examples
of types of debt, becausethey're not all the same. First
is, and I I know these verywell, because when I was at the
bank years and years ago, Iwould sell these right and and I
ended up buying a lot of themmyself, until I realized this
was a terrible plan, and when Ilearned the right way to do it,
(06:16):
I had to stop selling these, andI had to leave banking so I
could help people get out fromunder these. But here's so I
know these Well, I used to sellthem, right? There's three types
of debt. There's revolving debt.
Revolving debt is credit cards.
It's money that revolve. It'scredit that revolves. You use
it, you pay it off. It'savailable again to you, and it's
(06:39):
just, it's just kind of goes onforever, right? The interest
that you owe on your balance, itcompounds daily, right? And with
credit cards, you typically havea grace period. So if you pay it
off on that first statement whenyou had just made the purchases,
you don't pay any interest. Butafter that, you know, as soon as
(06:59):
you don't pay it all off. It's,it compounds interest daily. And
there's no fixed payoff, right?
There's no, you know, you getyour statement, there's your
balance owed, there's, you know,a minimum payment, and you can
kind of pay any, any amountwithin there that you want, and
it can drag on forever. Sothat's revolving debt. Then
(07:20):
there's installment loans.
Installment loans is, is whatwe're kind of used to with
student loans, car loans,mortgages. It's where you have a
fixed payment, and there's aschedule, right? I've got a two
year loan, a five year old, a 15year loan, a 30 year loan.
Here's the here's the monthlypayments. You kind of know when
it'll end right, provided youmake all those payments. And
(07:41):
then lastly is what I call linesof credit. Now, lines of credit
are very similar to revolvingdebt like a credit card, but
lines of credit will typicallyhave some type of expiration. So
when I was in banking, Iremember selling home equity
lines of credit, and it was aline of credit. You could use
it, pay it off, use it again,pay it off, and it might be
there for 10 years, and thenafter 10 years, it would turn
(08:01):
into an installment. Loan foranother 10 years or 20 years,
right? Based on whatever balanceit was at that expiration. And
so, you know, typically,business lines of credit are
going to be similar to that.
They might have a one year, afive year, a 10 year. They might
have clean up periods. There'sall these different things that
we won't get into but for us,for our conversation today,
there's, namely, three types.
(08:23):
There's revolving there'sinstallment loans and their
lines of credit, and all ofthese vary in their flexible
credit access and the structureof the loan, right? Sometimes
it's secured, sometimes it'sunsecured. Car Loans are secured
by the car. Mortgages secured byyour home. Credit cards are
unsecured, student loans areunsecured, right? So there's,
(08:43):
there's something that is,there's either collateral
securing the loan, or there'snot, right? So those are just
some different types. And so aswe look at these different types
of debt, there's differentinterest rates that might be
applied to them. You can havefixed interest rates, right? My
mortgage is at six and a halfpercent for 30 years. That's
(09:06):
fixed. It's not going to change.
Credit card, however, is goingto be tied to some burial could
be prime, prime plus 10, primeplus 18, prime plus 19, whatever
those numbers are. Do you havean idea the current prime rate
is 7.25 right? And we're notgoing to get into how that's
derived, where it comes from,but the idea is, with variable
(09:27):
rates, there's typically somerate that can move and can be
changed. Again. We're not goingto get into all those different
variables of how that wouldchange, but it's a rate that's
changed, and then you have someaddition or subtraction to it,
right? So when I first got intobanking, people might have home
(09:49):
equity loans, and it might havebeen prime minus one, right? So
that means one full interestpoint, you know, one full
interest you. A percentage belowprime, right? You might have
prime plus a half, right, which,in this case, 7.25 is prime. If
you have prime plus a half, it'dbe 7.75 and those rates, those
(10:09):
can change. Whenever thatprimary rate changes, right, you
would see a change. Usually youwould get a disclosure from your
bank within a day or two saying,hey, the effective rate of your
new date, because our our primerate, our primary rate that
we're basing this whole loan offof just changed on a fixed loan,
(10:29):
you wouldn't have that, right?
So I've seen credit cards thatare prime plus, you know, 15
prime plus 20. So those rateswould be in the 20s, almost 30%
right? And those compound Daily.
These are annual rates we'retalking about. You would just
divide that rate by 365 days ina year, and that would tell you
(10:51):
how much you have to pay, howfast, how much interest is
accumulating every day on thebalance that you owe. That's how
credit cards work. So so this isa lot of information I'm
throwing at you, but so here'show here's how the loan works.
Whenever you have a loan, it's afixed, let's say it's a fixed
(11:12):
term. So you have a I'm going touse the student loan example
that I used with the kids theother day at school. So imagine
this fellow, Jose made up. Madeup guy. He is a student loan of
105,000 that's the principalbalance. It's a 10 year term, so
he has to pay it back with 120payments, right? One payment
(11:35):
every month for the next 10years. His interest rate is six
and a half. So his payment everymonth, it's 1192 so $1,192 let's
just call 1200 his monthlypayments, 1200 bucks, when he
makes those payments for 120payments, the amount, hell of
paid back. And let's just dothis in our head, if it's 1200 a
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month, and he has 120 payments.
The amount of paid back is$144,000
his original balance was 105so basically, right. So he he's
gonna pay 144 but his balance isonly 105, that's 39,000
(12:18):
difference. What the heck? Well,that 39,000 is all interest.
It's all interest. When I wasexplaining this to the kids,
their eyes like blew up. They'relike, Wait a second. So if he
only had to pay the 105 back,right? There was no interest on
(12:41):
it, but he was, you know, hecould, he could save an extra
what's, what's the math on that?
Almost $400 right, a month wouldsave up to kind of create that,
say, $350 a month would createthat $39,000 savings he could
have had, but it's costing morethan that. It's also costing him
(13:04):
all of that over 10 years,right, which is a long period of
time to be spent paying allthat. Right? To give you an
example, and this is howamortization works, because the
balance is really high at thebeginning of the loan, the
interest that's accumulated ismore so what do I mean by that?
(13:25):
So it's 105,000when his first payment of 1200
bucks, 650 of that, let's say,is principal, the other 550 is
interest. Contrast that all theway to his last payment,
his last payment of $1,200about 1180 of that $1,180
(13:52):
of that is principal, and it'sonly 20 bucks of interest,
right? So it's not like a cruelway for the banks to just front
load the interest. The truth is,you're paying more interest
upfront because you owe more,and as the balance goes down,
you pay less and less interest,right? So if you think, if
you've had a student loan, andyou've gotten a statement at the
(14:14):
end of the year, right, becauseyou can tax deduct a student
loan interest off your taxreturn, and you might have had
student loans, and you see thatthat amount gets smaller and
smaller every year. Iexperienced that right? My first
year, maybe the the interestthat I paid on my student loan
was like $2,000 and the nextyear, it was like 1600 and then
(14:34):
1200 and then 1000 then all of asudden, it's gone right? And you
pay off your student loan. Sothe faster you pay, the more you
pay principal on your loan, theless interest you'll pay. So
what do I mean by that you canmake your monthly payment of
1200 bucks and then add $500 ofa principal payment, right?
(14:57):
Principal reduction, and then soin. Instead of only 1200 bucks,
let's say you're adding 500you're actually making $1,700
payment. Well, instead of just650 going towards interest.
Well, now 1200 will go towardsinterest, or 1150 will go
towards interest. And the moneyyou owed that you paid on
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interest, that first payment,that 550 you still paid that.
But the next month that moneythat it's not going to be 550
anymore. Now it will drop tolike 540 right? Because you're
paying off more and moreprincipal, and if you just write
a check for 105, that firstmonth, that's all it was, right?
You didn't have to pay those$39,000 of interest. So that's a
(15:41):
loan, and that's how interestworks on a loan. Here's here's a
crazy one, credit cards. So theexample I gave the kids the
other day, I told the kids, allright, Jose, he's in a mess. He
owes $3,200 on his credit card.
He hasn't been able to pay itoff. But fortunately, the
monthly payment is only $55 thatis the minimum payment is only
(16:01):
$55 and the kids were buildingthe budget. And then there was,
you know, this fellow Jose, hadto figure out what he was doing.
You know, how much could heafford for an apartment? What
should he do? Should he pay moretowards the student loan, his
car payment. He had the creditcard, and so I started showing
(16:22):
the amortization that's whatthis is called. When you kind of
look at principal and interestpayments over the life of a loan
and watch what happens to itevery month, I show them the
amortization calculator for thecredit card. And so the 3200
that he owed his mental hisinterest rate was 20 and a half
(16:42):
percent, which is not terrible,actually for a credit card.
His first payment of $55.54his actual payment was $55.60
5464 right?
So about almost all of hispayment went towards interest,
(17:07):
and 96 cents went to principal.
So Jose owed 3200 the firstmonth. The next month, he owed
3199 right. 3199 and the kidswere looking at this, realizing,
Oh, my goodness, this is goingto take him forever to pay it
off. And I showed the kids, Iran an amortization calculator.
(17:27):
Let's say we wanted, we wantedhis $55.60 he was just going to
pay that every month. How longwill it take him to pay off the
credit card balance? It wasgoing to be 20 years, right? So
if he just slowly pays that offon the minimum payment that the
credit card companies ask him tomake, his original balance was
3200 but the total the $55 amonth for 240 months, right? 20
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years, the total he would havepaid back would have been$13,300
That means his 3200was the principal. That's all he
actually used and borrowed, buthe ends up paying over $10,000
more in interest,and very quickly, again, I show
(18:13):
the kids the calculators. Well,what? What would happen if you
didn't have right? So we'll lookat Jose with his with his loan,
his credit card payment, becausethat is, you know, $55 a month
is not, is not the end of theworld as far as a payment. But
what if he didn't have that,right? So let's say he doesn't
(18:37):
have a credit card instead, he'sinvesting his $55 a month for 20
years. I'm punching this into acalculator right now. If he did
that for 20 years, at the end of20 years, instead of having paid
(18:58):
13,000 to the credit cardcompany, right? Instead of
paying $11,000 in interest, ifhe invested $55 a month for 20
years, he'd have almost $45,000in his well diversified
investment account. That'scrazy, right? So the little like
the easy cost to kind of getyour head around, is this total
(19:21):
cost of interest, right? So 3200turns into over $13,000 of
payments back. But if forgetthat interest he had to pay if
he was able to free himself upwith that credit card, right?
Where the best way to free it upwould be, have never gotten a
credit card and never racked upcredit card debt if he just
invested the $55.20 $45,000let's go the student loan. This
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was the one that really blowsthe kids minds, right? Let's
just do it for 10 years. Sostudent gets student loan.
105,000 comes out at. At six anda half percent for 10 years,
he's got to pay $1,200 a month.
So at the end of 10 years,they've paid $143,000
(20:09):
right? 38,000 was interest, but$143,000
well, if he had invested the1200
and not had a student loan atthe end of 10 years, they've got
$246,000 that sounds like a veryhefty down payment on a house
(20:35):
right at 31 or 32 years old,right? And you could probably,
let's see. Let me see if thiscalculator will tell me at
at yearfive and a half, actually, that
money gets to about 100 grand,which is not a bad down payment
for a house. So this, this isthe point that I'm trying to
(20:58):
articulate here, that there issuch a larger cost
than what we're faced with.
Right the you go buy a car, andyou go to the car dealer,
(21:19):
and you say, how much is thecar? And they say, oh, it's, you
know, I drive by them all thetime. The drive by the car
dealerships, and I'll seestickers in the cars window.
Hey, 399, a month, right? Orreally nice looking truck, I'd
love to replace my truck, but areally nice looking truck, say,
(21:40):
749 a month. And people think,wow, I make like, six grand a
month. So I'll use 749 thatmakes sense, like I have that
available. But they don't stepback and look at the big
picture, and they say, actually,how much is this really going to
cost me? Right? And when youstart to do the math, you
realize it's 10s of 1000s ofdollars more than I ever
(22:04):
thought, because you didn't stopand do the math. Now, there's
some other challenges too, likeI mentioned, credit cards real
quick. There's some credit cardsthat, you know, and I
experienced this when I firstgot a credit card back. Oh, long
time. I don't have a credit cardfor over 10 years now, Taryn and
(22:26):
I don't use them. But when Igraduated high school, one of
the first things I did when Iwent to college, I got a credit
card, and I realized veryabruptly, and I was very worried
about it, that my minimumpayment, that I was making, that
I thought I was doing somethingwhen I had a balance, the
minimum payment wasn't evencovering the interest. So what
(22:46):
does that mean? Let me give youthat credit card example we
already had, right if he owed3200 Jose was 3200 on it, 20.49%
interest rate, the interest fromthat first month is $54
sometimes the credit cardcompanies say, just give us a
$30 minimum payment and we'll,we'll, we'll be cool with you.
(23:10):
Well, the problem is, you paythem $30
but the interest that month wasactually 54
that's $24 of interest that youdidn't pay them.
They it's called, theycapitalize it onto the loan. So
instead of your balance goingfrom 3200 and going down because
(23:31):
you made a $30 payment, itactually would go up to $3,224
and now the next month, eventhough you've made a payment,
you now owe more than you didbecause you didn't pay off the
full interest that accrued thatmonth. We call in the banking
(23:51):
and finance world, we call thatnegative amortization, or we'll
say a negam loan means thebalance can actually grow on you
if you're not paying the fullinterest, and you have a credit
card, you know, for people youknow in your life, maybe you
have experienced this, if you'vehad trouble with credit card
debt, and you don't look at it,and you get scared, and you
(24:15):
finally, one day say, I got todo something about this. So you
look at the state, and you startdoing the math, and you're
figuring out, what do I actuallyowe? And you have a panic attack
because you owe way more thanyou ever thought. It's usually
because of negativeamortization, which, when you
signed up for it, you said, Hey,I'm cool with this. I'm totally
cool with this. I'm just gonnapay it off every month. I'm not
gonna have these problems. Onlygonna use it in case of
(24:36):
emergency. But then they getyou, and they just rake in the
money off of you. You've got tobe careful for negative
amortization loans. You got toavoid those or any situation. I
mean, just avoid debt. But ifyou're trying to pay things off
and look at payments. Don't justlook at the minimum payment.
Look at what are they doing?
What are they charging you ininterest? Because. You got to
(24:58):
pay at least that much everymonth if you want to see that
thing starting to go down allright. Now, here's something
else I just want to touch onrelated to all of this. When
when you hear car commercials,or you go to the bank and you
get pre approved for a loan,you'll get some type of rate
disclosure, and it'll referenceAPR, annual percentage rate. And
(25:21):
here's what that means. That wasa way for banks. It was became a
regulation that they had to beable to disclose rates based on
an annual rate, right? They hadto annualize rates to make it
easy for consumers to actuallysee what different loans cost
(25:41):
us. Sometimes lenders could addsome fees to a loan, which, when
you add that in, the interestrates actually looks higher than
you thought it was, but that'sbecause they have to add those,
some of those fees in to showyou the true cost, right? That
the APR, so, so this is thetotal cost of borrowing.
(26:04):
Hopefully, this is helpful toyou understanding it. There's so
many different scenarios youcould look at, right, a $30,000
car at 7% for 84 months. That'sa car payment of 4450
$30,000 car. You end up paying37,500
for it, right? A mortgage, youget a $350,000
(26:25):
mortgage at 6% on a 30 yearloan, the total interest, the
total interest you pay back, is405 the total amount you paid
back was 755 that's incredible,right? You the interest cost
more than the House did. Soreduce these costs, one by not
(26:47):
borrowing, but if you've gotloans right now, pay them off
early. It frees up your cashflow, which just allows you to
do other things that you want todo, or that you feel Lord is
calling you to do with yourmoney, you're able to be more
generous. It gives you moreflexibility for future goals.
Borrowers slave to the lender inProverbs, right? It frees you
(27:10):
from that. So look at theinterest rates on all the debt
you have if you're trying totackle debt right now, take a
look at it. Get in there, makesure you're paying all the
interest and the principal everymonth so that you're not having
negative amortization loans.
Stop using credit card. Stopusing that revolving debt. Stop
(27:31):
using lines of credit. Whenyou're trying to pay things
down. You got a hole and you'retrying to dig, dig your way out
the bottom. You can't do it.
Make extra payments towardsprincipal. Do the Debt Snowball,
where you list your debts fromsmallest to biggest, and you
tackle the biggest, the smallestone first, right? You make
(27:52):
payments on everything, but youall the extra money throughout
the smallest one. First, you getrid of it, and you just
everything you're throwing onthe small and you throw it the
next small, the next biggest,then the next biggest, then the
next biggest. So you just haveone left. You're throwing
everything at it. It's gone.
That's what we did to ourmortgage. Is gone. Create a
date. Do the math. Create afreedom from debt. Date, right?
Make a visual payoff timeline.
(28:17):
Put it on your fridge, put onyour your closet door, whatever
it would do to motivate you sodebt isn't just a number. It
affects your relationships, yourmarriage. It affects it affects
stress, and it has a big impacton your future, hopes and
dreams, and it ties your handsup to be able to just go do
(28:39):
whatever the Lord's calling youto do because I've said this
before. So I talked to friendswho are priests, who are in the
seminary. Debt is a hugechallenge for people pursuing
their vocation, whether it bereligious life or married life.
I talk to young couples thatare, you know, waited so long to
(28:59):
get married. They're not lookingto get married yet, even though
they feel called to marriagebecause they have all the
student loan debt. You know,it's a real, real thing. So we
need freedom from this debt. Sodon't borrow. Pay it off as fast
as you can. I've got somepodcast episodes on paying off
debt. You can just go in thesearch and just do debt pay off,
(29:21):
and you'll get a few differentthings coming up. So I hope this
has been helpful. Thank you forjoining me today. God bless.
Thank you for listening toCatholic money talk. I hope you
join us again next time, pleaseclick Subscribe on your podcast
app to get notified of newepisodes. God bless you and have
(29:44):
a great day. Foreign.
Paul, Welcome to Catholic moneytalk, where we talk about all
things money and finance, and wetry to do it through a lens of
being Catholic, where ourultimate goal is to one day be
in Heaven with the Lord. I amyour host. Paul Scarfone, thank
you for being here today.
Welcome back to Catholic moneytalk. Today, I want to talk
(00:23):
about the true cost of debt.
What borrowing really costs you,and we're going to dive into
that. But before we do, let'ssay a prayer in the name of the
Father and of the Son and of theHoly Spirit. Amen, Heavenly
Father. We thank you for thisday. We thank you for all the
ways that you love and bless us.
Lord, we know that you have anawesome plan for us. Just fill
(00:44):
us with your Holy Spirit. Giveus a great desire to pursue your
will in our lives, Come HolySpirit. We ask all this in Jesus
name, amen, in the name of theFather and of the Son and of the
Holy Spirit, Amen. So the truecost of debt? What borrowing
really costs you? Wow, that is amouthful. Well, this is
(01:08):
something I talk about a lot,but very clearly it hit me last
week when I was teaching thehigh schoolers and my kids
school, the watching their faceand the aha moments as we spoke
about the full cost of debt,right? The payments, the
(01:31):
interest over time, and thatdoesn't really even factor into
the lost opportunities of whatwe could be doing with that
money. So I want to talk aboutthat because the the looks on
the faces of those kids told mevery clearly that, you know,
forget about just teachingpersonal finance that message
the true cost of what debt isright the but what borrowing
(01:54):
really costs us is not hammeredhome enough to most of us and
and how do we know that? Well,we know that debt is normal.
It's probably one of the mostnormal things. So here's some
stats how the average householdhas an AV in the US has an
(02:17):
average credit card debt, justover $6,000 okay, in the US, the
average household debt, and thisis all types of debt, is over
100,000 we spoke recently aboutthe car payments, the average
car payment in the US, averagemonthly payment for used cars is
(02:42):
$521 for new cars, the averagemonthly payment is $745
a month. Like these are big, bignumbers, and sometimes we just
hear those numbers. This is thenormal part. We hear those
numbers. We look at our income,right? For those people who have
(03:03):
debt, they look at their incomeand they think, can I afford
that payment? And that's allthey're looking at, right?
They're just looking at thepayment amount. So the activity
I did with the kids the otherday was I, we, I give them
scenarios, right? So last week,scenario was meet Jose and
(03:25):
Sally, and I just give them twodifferent scenarios, basically,
word problems. Jose justgraduated from college. He makes
this much money. He has a carpayment, he has a student loan
payment. He's looking for aplace to rent, build his budget
for him, right? And and I givethe kids those kind of word
problems, because math in lifeis actually word problems,
(03:46):
right? It's real life situationsthat we have to figure out. And
sometimes there's some basicmath involved. But the normal
part of debt is we look at, oh,can I afford that payment?
Right? I've got a friend. Theyjust, I believe they closed on a
house today, which is veryexciting, you know, they go to
the bank, and the bank says youcan make a payment up to say,
(04:07):
you know, you can borrow moneyto have a mortgage up to a
certain amount of money, andthat's based on the mortgage
company did math, based on theirbudget, and what the bank thinks
they could afford As a monthlypayment and then using the
interest rate and stuff you backinto how much they could
possibly borrow. But as peoplethat are responsible for
(04:29):
everything the Lord has given tous, including our money and the
ability to earn it right, theLord asks us to steward these
things properly. We don't wantto kind of relinquish our
decision making to the bankwho's trying to sell us a
mortgage. Rather, we shouldcalculate how much we think we
should spend on our home, and ifwe're going to get a loan to buy
(04:50):
it, then figure out what's a 15year or 30 year, what's the most
reasonable, prudent option sothat we're managing our money.
Well, and we pray about thesethings, and we see where the
Lord's telling us, it's not justmath, right? And the normal part
of debt is we want this.
Everyone seems to be borrowing.
(05:11):
I think it was like 80% ofhouseholds have debt in the US.
That's a variety kind variety ofkinds of debt, but the most
normal ones outside of amortgage, are going to be the
top three, I would say, arecredit card debt, student loans
and car payments, right? Thoseare the the that's like the
(05:33):
trifecta of burying yourselfunder a life of payments. So
it's very, very normal. So whatwe want to understand is how
much it actually costs us, notjust the monthly payment. And in
order to do that, we need tounderstand how interest works,
and then what, what do we needto avoid? And how do we pay
(05:54):
these off smartly? So I'm goingto just give you quick examples
of types of debt, becausethey're not all the same. First
is, and I I know these verywell, because when I was at the
bank years and years ago, Iwould sell these right and and I
ended up buying a lot of themmyself, until I realized this
was a terrible plan, and when Ilearned the right way to do it,
(06:16):
I had to stop selling these, andI had to leave banking so I
could help people get out fromunder these. But here's so I
know these Well, I used to sellthem, right? There's three types
of debt. There's revolving debt.
Revolving debt is credit cards.
It's money that revolve. It'scredit that revolves. You use
it, you pay it off. It'savailable again to you, and it's
(06:39):
just, it's just kind of goes onforever, right? The interest
that you owe on your balance, itcompounds daily, right? And with
credit cards, you typically havea grace period. So if you pay it
off on that first statement whenyou had just made the purchases,
you don't pay any interest. Butafter that, you know, as soon as
(06:59):
you don't pay it all off. It's,it compounds interest daily. And
there's no fixed payoff, right?
There's no, you know, you getyour statement, there's your
balance owed, there's, you know,a minimum payment, and you can
kind of pay any, any amountwithin there that you want, and
it can drag on forever. Sothat's revolving debt. Then
(07:20):
there's installment loans.
Installment loans is, is whatwe're kind of used to with
student loans, car loans,mortgages. It's where you have a
fixed payment, and there's aschedule, right? I've got a two
year loan, a five year old, a 15year loan, a 30 year loan.
Here's the here's the monthlypayments. You kind of know when
it'll end right, provided youmake all those payments. And
(07:41):
then lastly is what I call linesof credit. Now, lines of credit
are very similar to revolvingdebt like a credit card, but
lines of credit will typicallyhave some type of expiration. So
when I was in banking, Iremember selling home equity
lines of credit, and it was aline of credit. You could use
it, pay it off, use it again,pay it off, and it might be
there for 10 years, and thenafter 10 years, it would turn
(08:01):
into an installment. Loan foranother 10 years or 20 years,
right? Based on whatever balanceit was at that expiration. And
so, you know, typically,business lines of credit are
going to be similar to that.
They might have a one year, afive year, a 10 year. They might
have clean up periods. There'sall these different things that
we won't get into but for us,for our conversation today,
there's, namely, three types.
(08:23):
There's revolving there'sinstallment loans and their
lines of credit, and all ofthese vary in their flexible
credit access and the structureof the loan, right? Sometimes
it's secured, sometimes it'sunsecured. Car Loans are secured
by the car. Mortgages secured byyour home. Credit cards are
unsecured, student loans areunsecured, right? So there's,
(08:43):
there's something that is,there's either collateral
securing the loan, or there'snot, right? So those are just
some different types. And so aswe look at these different types
of debt, there's differentinterest rates that might be
applied to them. You can havefixed interest rates, right? My
mortgage is at six and a halfpercent for 30 years. That's
(09:06):
fixed. It's not going to change.
Credit card, however, is goingto be tied to some burial could
be prime, prime plus 10, primeplus 18, prime plus 19, whatever
those numbers are. Do you havean idea the current prime rate
is 7.25 right? And we're notgoing to get into how that's
derived, where it comes from,but the idea is, with variable
(09:27):
rates, there's typically somerate that can move and can be
changed. Again. We're not goingto get into all those different
variables of how that wouldchange, but it's a rate that's
changed, and then you have someaddition or subtraction to it,
right? So when I first got intobanking, people might have home
(09:49):
equity loans, and it might havebeen prime minus one, right? So
that means one full interestpoint, you know, one full
interest you. A percentage belowprime, right? You might have
prime plus a half, right, which,in this case, 7.25 is prime. If
you have prime plus a half, it'dbe 7.75 and those rates, those
(10:09):
can change. Whenever thatprimary rate changes, right, you
would see a change. Usually youwould get a disclosure from your
bank within a day or two saying,hey, the effective rate of your
new date, because our our primerate, our primary rate that
we're basing this whole loan offof just changed on a fixed loan,
(10:29):
you wouldn't have that, right?
So I've seen credit cards thatare prime plus, you know, 15
prime plus 20. So those rateswould be in the 20s, almost 30%
right? And those compound Daily.
These are annual rates we'retalking about. You would just
divide that rate by 365 days ina year, and that would tell you
(10:51):
how much you have to pay, howfast, how much interest is
accumulating every day on thebalance that you owe. That's how
credit cards work. So so this isa lot of information I'm
throwing at you, but so here'show here's how the loan works.
Whenever you have a loan, it's afixed, let's say it's a fixed
(11:12):
term. So you have a I'm going touse the student loan example
that I used with the kids theother day at school. So imagine
this fellow, Jose made up. Madeup guy. He is a student loan of
105,000 that's the principalbalance. It's a 10 year term, so
he has to pay it back with 120payments, right? One payment
(11:35):
every month for the next 10years. His interest rate is six
and a half. So his payment everymonth, it's 1192 so $1,192 let's
just call 1200 his monthlypayments, 1200 bucks, when he
makes those payments for 120payments, the amount, hell of
paid back. And let's just dothis in our head, if it's 1200 a
(11:58):
month, and he has 120 payments.
The amount of paid back is$144,000
his original balance was 105so basically, right. So he he's
gonna pay 144 but his balance isonly 105, that's 39,000
(12:18):
difference. What the heck? Well,that 39,000 is all interest.
It's all interest. When I wasexplaining this to the kids,
their eyes like blew up. They'relike, Wait a second. So if he
only had to pay the 105 back,right? There was no interest on
(12:41):
it, but he was, you know, hecould, he could save an extra
what's, what's the math on that?
Almost $400 right, a month wouldsave up to kind of create that,
say, $350 a month would createthat $39,000 savings he could
have had, but it's costing morethan that. It's also costing him
(13:04):
all of that over 10 years,right, which is a long period of
time to be spent paying allthat. Right? To give you an
example, and this is howamortization works, because the
balance is really high at thebeginning of the loan, the
interest that's accumulated ismore so what do I mean by that?
(13:25):
So it's 105,000when his first payment of 1200
bucks, 650 of that, let's say,is principal, the other 550 is
interest. Contrast that all theway to his last payment,
his last payment of $1,200about 1180 of that $1,180
(13:52):
of that is principal, and it'sonly 20 bucks of interest,
right? So it's not like a cruelway for the banks to just front
load the interest. The truth is,you're paying more interest
upfront because you owe more,and as the balance goes down,
you pay less and less interest,right? So if you think, if
you've had a student loan, andyou've gotten a statement at the
(14:14):
end of the year, right, becauseyou can tax deduct a student
loan interest off your taxreturn, and you might have had
student loans, and you see thatthat amount gets smaller and
smaller every year. Iexperienced that right? My first
year, maybe the the interestthat I paid on my student loan
was like $2,000 and the nextyear, it was like 1600 and then
(14:34):
1200 and then 1000 then all of asudden, it's gone right? And you
pay off your student loan. Sothe faster you pay, the more you
pay principal on your loan, theless interest you'll pay. So
what do I mean by that you canmake your monthly payment of
1200 bucks and then add $500 ofa principal payment, right?
(14:57):
Principal reduction, and then soin. Instead of only 1200 bucks,
let's say you're adding 500you're actually making $1,700
payment. Well, instead of just650 going towards interest.
Well, now 1200 will go towardsinterest, or 1150 will go
towards interest. And the moneyyou owed that you paid on
(15:17):
interest, that first payment,that 550 you still paid that.
But the next month that moneythat it's not going to be 550
anymore. Now it will drop tolike 540 right? Because you're
paying off more and moreprincipal, and if you just write
a check for 105, that firstmonth, that's all it was, right?
You didn't have to pay those$39,000 of interest. So that's a
(15:41):
loan, and that's how interestworks on a loan. Here's here's a
crazy one, credit cards. So theexample I gave the kids the
other day, I told the kids, allright, Jose, he's in a mess. He
owes $3,200 on his credit card.
He hasn't been able to pay itoff. But fortunately, the
monthly payment is only $55 thatis the minimum payment is only
(16:01):
$55 and the kids were buildingthe budget. And then there was,
you know, this fellow Jose, hadto figure out what he was doing.
You know, how much could heafford for an apartment? What
should he do? Should he pay moretowards the student loan, his
car payment. He had the creditcard, and so I started showing
(16:22):
the amortization that's whatthis is called. When you kind of
look at principal and interestpayments over the life of a loan
and watch what happens to itevery month, I show them the
amortization calculator for thecredit card. And so the 3200
that he owed his mental hisinterest rate was 20 and a half
(16:42):
percent, which is not terrible,actually for a credit card.
His first payment of $55.54his actual payment was $55.60
5464 right?
So about almost all of hispayment went towards interest,
(17:07):
and 96 cents went to principal.
So Jose owed 3200 the firstmonth. The next month, he owed
3199 right. 3199 and the kidswere looking at this, realizing,
Oh, my goodness, this is goingto take him forever to pay it
off. And I showed the kids, Iran an amortization calculator.
(17:27):
Let's say we wanted, we wantedhis $55.60 he was just going to
pay that every month. How longwill it take him to pay off the
credit card balance? It wasgoing to be 20 years, right? So
if he just slowly pays that offon the minimum payment that the
credit card companies ask him tomake, his original balance was
3200 but the total the $55 amonth for 240 months, right? 20
(17:52):
years, the total he would havepaid back would have been$13,300
That means his 3200was the principal. That's all he
actually used and borrowed, buthe ends up paying over $10,000
more in interest,and very quickly, again, I show
(18:13):
the kids the calculators. Well,what? What would happen if you
didn't have right? So we'll lookat Jose with his with his loan,
his credit card payment, becausethat is, you know, $55 a month
is not, is not the end of theworld as far as a payment. But
what if he didn't have that,right? So let's say he doesn't
(18:37):
have a credit card instead, he'sinvesting his $55 a month for 20
years. I'm punching this into acalculator right now. If he did
that for 20 years, at the end of20 years, instead of having paid
(18:58):
13,000 to the credit cardcompany, right? Instead of
paying $11,000 in interest, ifhe invested $55 a month for 20
years, he'd have almost $45,000in his well diversified
investment account. That'scrazy, right? So the little like
the easy cost to kind of getyour head around, is this total
(19:21):
cost of interest, right? So 3200turns into over $13,000 of
payments back. But if forgetthat interest he had to pay if
he was able to free himself upwith that credit card, right?
Where the best way to free it upwould be, have never gotten a
credit card and never racked upcredit card debt if he just
invested the $55.20 $45,000let's go the student loan. This
(19:48):
was the one that really blowsthe kids minds, right? Let's
just do it for 10 years. Sostudent gets student loan.
105,000 comes out at. At six anda half percent for 10 years,
he's got to pay $1,200 a month.
So at the end of 10 years,they've paid $143,000
(20:09):
right? 38,000 was interest, but$143,000
well, if he had invested the1200
and not had a student loan atthe end of 10 years, they've got
$246,000 that sounds like a veryhefty down payment on a house
(20:35):
right at 31 or 32 years old,right? And you could probably,
let's see. Let me see if thiscalculator will tell me at
at yearfive and a half, actually, that
money gets to about 100 grand,which is not a bad down payment
for a house. So this, this isthe point that I'm trying to
(20:58):
articulate here, that there issuch a larger cost
than what we're faced with.
Right the you go buy a car, andyou go to the car dealer,
(21:19):
and you say, how much is thecar? And they say, oh, it's, you
know, I drive by them all thetime. The drive by the car
dealerships, and I'll seestickers in the cars window.
Hey, 399, a month, right? Orreally nice looking truck, I'd
love to replace my truck, but areally nice looking truck, say,
(21:40):
749 a month. And people think,wow, I make like, six grand a
month. So I'll use 749 thatmakes sense, like I have that
available. But they don't stepback and look at the big
picture, and they say, actually,how much is this really going to
cost me? Right? And when youstart to do the math, you
realize it's 10s of 1000s ofdollars more than I ever
(22:04):
thought, because you didn't stopand do the math. Now, there's
some other challenges too, likeI mentioned, credit cards real
quick. There's some credit cardsthat, you know, and I
experienced this when I firstgot a credit card back. Oh, long
time. I don't have a credit cardfor over 10 years now, Taryn and
(22:26):
I don't use them. But when Igraduated high school, one of
the first things I did when Iwent to college, I got a credit
card, and I realized veryabruptly, and I was very worried
about it, that my minimumpayment, that I was making, that
I thought I was doing somethingwhen I had a balance, the
minimum payment wasn't evencovering the interest. So what
(22:46):
does that mean? Let me give youthat credit card example we
already had, right if he owed3200 Jose was 3200 on it, 20.49%
interest rate, the interest fromthat first month is $54
sometimes the credit cardcompanies say, just give us a
$30 minimum payment and we'll,we'll, we'll be cool with you.
(23:10):
Well, the problem is, you paythem $30
but the interest that month wasactually 54
that's $24 of interest that youdidn't pay them.
They it's called, theycapitalize it onto the loan. So
instead of your balance goingfrom 3200 and going down because
(23:31):
you made a $30 payment, itactually would go up to $3,224
and now the next month, eventhough you've made a payment,
you now owe more than you didbecause you didn't pay off the
full interest that accrued thatmonth. We call in the banking
(23:51):
and finance world, we call thatnegative amortization, or we'll
say a negam loan means thebalance can actually grow on you
if you're not paying the fullinterest, and you have a credit
card, you know, for people youknow in your life, maybe you
have experienced this, if you'vehad trouble with credit card
debt, and you don't look at it,and you get scared, and you
(24:15):
finally, one day say, I got todo something about this. So you
look at the state, and you startdoing the math, and you're
figuring out, what do I actuallyowe? And you have a panic attack
because you owe way more thanyou ever thought. It's usually
because of negativeamortization, which, when you
signed up for it, you said, Hey,I'm cool with this. I'm totally
cool with this. I'm just gonnapay it off every month. I'm not
gonna have these problems. Onlygonna use it in case of
(24:36):
emergency. But then they getyou, and they just rake in the
money off of you. You've got tobe careful for negative
amortization loans. You got toavoid those or any situation. I
mean, just avoid debt. But ifyou're trying to pay things off
and look at payments. Don't justlook at the minimum payment.
Look at what are they doing?
What are they charging you ininterest? Because. You got to
(24:58):
pay at least that much everymonth if you want to see that
thing starting to go down allright. Now, here's something
else I just want to touch onrelated to all of this. When
when you hear car commercials,or you go to the bank and you
get pre approved for a loan,you'll get some type of rate
disclosure, and it'll referenceAPR, annual percentage rate. And
(25:21):
here's what that means. That wasa way for banks. It was became a
regulation that they had to beable to disclose rates based on
an annual rate, right? They hadto annualize rates to make it
easy for consumers to actuallysee what different loans cost
(25:41):
us. Sometimes lenders could addsome fees to a loan, which, when
you add that in, the interestrates actually looks higher than
you thought it was, but that'sbecause they have to add those,
some of those fees in to showyou the true cost, right? That
the APR, so, so this is thetotal cost of borrowing.
(26:04):
Hopefully, this is helpful toyou understanding it. There's so
many different scenarios youcould look at, right, a $30,000
car at 7% for 84 months. That'sa car payment of 4450
$30,000 car. You end up paying37,500
for it, right? A mortgage, youget a $350,000
(26:25):
mortgage at 6% on a 30 yearloan, the total interest, the
total interest you pay back, is405 the total amount you paid
back was 755 that's incredible,right? You the interest cost
more than the House did. Soreduce these costs, one by not
(26:47):
borrowing, but if you've gotloans right now, pay them off
early. It frees up your cashflow, which just allows you to
do other things that you want todo, or that you feel Lord is
calling you to do with yourmoney, you're able to be more
generous. It gives you moreflexibility for future goals.
Borrowers slave to the lender inProverbs, right? It frees you
(27:10):
from that. So look at theinterest rates on all the debt
you have if you're trying totackle debt right now, take a
look at it. Get in there, makesure you're paying all the
interest and the principal everymonth so that you're not having
negative amortization loans.
Stop using credit card. Stopusing that revolving debt. Stop
(27:31):
using lines of credit. Whenyou're trying to pay things
down. You got a hole and you'retrying to dig, dig your way out
the bottom. You can't do it.
Make extra payments towardsprincipal. Do the Debt Snowball,
where you list your debts fromsmallest to biggest, and you
tackle the biggest, the smallestone first, right? You make
(27:52):
payments on everything, but youall the extra money throughout
the smallest one. First, you getrid of it, and you just
everything you're throwing onthe small and you throw it the
next small, the next biggest,then the next biggest, then the
next biggest. So you just haveone left. You're throwing
everything at it. It's gone.
That's what we did to ourmortgage. Is gone. Create a
date. Do the math. Create afreedom from debt. Date, right?
Make a visual payoff timeline.
(28:17):
Put it on your fridge, put onyour your closet door, whatever
it would do to motivate you sodebt isn't just a number. It
affects your relationships, yourmarriage. It affects it affects
stress, and it has a big impacton your future, hopes and
dreams, and it ties your handsup to be able to just go do
(28:39):
whatever the Lord's calling youto do because I've said this
before. So I talked to friendswho are priests, who are in the
seminary. Debt is a hugechallenge for people pursuing
their vocation, whether it bereligious life or married life.
I talk to young couples thatare, you know, waited so long to
(28:59):
get married. They're not lookingto get married yet, even though
they feel called to marriagebecause they have all the
student loan debt. You know,it's a real, real thing. So we
need freedom from this debt. Sodon't borrow. Pay it off as fast
as you can. I've got somepodcast episodes on paying off
debt. You can just go in thesearch and just do debt pay off,
(29:21):
and you'll get a few differentthings coming up. So I hope this
has been helpful. Thank you forjoining me today. God bless.
Thank you for listening toCatholic money talk. I hope you
join us again next time, pleaseclick Subscribe on your podcast
app to get notified of newepisodes. God bless you and have
(29:44):
a great day. Foreign.
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