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teach kids about interest ratesInterest rates can have a huge impact on your life—both as a borrower who gets hit with it and as a lender who can earn it. Teaching your kids about money and interest is something you should do from a young age. After all, even a young child can be affected by the power of interest through something as innocent as failing to return a library book on time. And along with preparing them for the real financial world, there are other reasons you should teach your kids about interest before they strike out on their own.

Understanding the True Cost of Things

Whether you’re paying down a credit card debt, working off a student loan, leasing a car, working on your debt resolution, or negotiating a mortgage, interest will be part of most financial transactions. Young adults must realize that interest will be a factor in almost every financial transaction they make, and must be ready to budget for it. For instance, when your daughter buys her first car for $15,000 and finances it over 10 years at 3.75 percent, she’ll also have to factor in the extra $3,000 she’ll pay in interest over the decade.   

Knowing How to Save Money with Smart Purchases

Once your kids realize the impact that interest can make on a purchase, they’ll be more inclined and better equipped to shop around to find the best deals. In the example of your daughter buying her first car; if she already knew the power of interest, she’d realize that instead of paying $18,000 for a $15,000 car, she could actually shop around for a better interest rate and pay the same overall price for a $17,000 car financed at 1.15 percent.

Or, she’d realize that she could shop for the 1.15 percent interest rate for the $15,000 car and pay less than $1,000 in interest over the financing term. By teaching your kids about interest before they go out into the world and make big financial decisions for themselves, you’ll actually teach them to save their money and stretch their dollars, helping them to get out of debt faster and more efficiently in their adult lives.

Short-Term Gain May Equal Long-Term Pain

Credit cards are one area that young people end up wasting a lot of money in interest payments. It’s wise to let them know that as soon as they have a reguilar income, credit card companies will come calling and the cycle will begin. Quite often, it’s easy to set patience aside and make that purchase because you want something now, rather than waiting. Of course, when life gets in the way of your plan to pay off the full balance, the interest merry-go-round continues.

Interest Terms to Teach Your Kids

APR: The annual percentage rate, which dictates the amount of interest you’ll pay on a loan.

Term: The length of time a loan is valid for. Some loans, like mortgages, can be renegotiated after the term is up.

Amortization: This refers to the period of time over which you pay down a debt completely.

Secured and unsecured: These refer to loans that either do or do not require collateral.

Prime: This is the lowest possible interest rate available for commercial loans.

Teaching your kids about interest before they leave home is an invaluable lesson that will help them at every turn when they’re making financial decisions. This lesson will help them save money, earn more money, plan their finances, and secure their futures. Not only do interest lessons teach them about the world, but they also give your kids an edge that will help them navigate the tricky waters of banking, loans, and investments. To find out more, contact a debt specialist today.