When taking out loans, the amount you owe back is almost always higher than the original amount borrowed. But why?
The culprit is interest rates, also known as the price you pay to borrow money – but it’s more complicated than that.
When you borrow to pay for a large expense, a bank will charge a modest amount of interest on top of the amount you borrowed.
This works the other way, too – like when you deposit money into a savings account. Technically, the bank is borrowing money from you, and will pay you interest for holding onto your money.
However, banks are not abundant in Black communities, leaving many of us to resort to borrowing from high-interest services like check cashing counters and payday loans. These services charge outrageous interest rates, and borrowing from them can mean paying back DOUBLE the original loan.
It’s also important to always be aware of whether a loan charges compound interest, which is when the borrower pays interest on the loan itself AND on the interest being charged on the loan!
Whenever money is borrowed, interest is charged – but sometimes it's far too high. Many Black Americans never build wealth because of high-interest loans.
It's crucial that we fully understand this system and use it to our best advantage to build wealth and achieve financial liberation!