February 28, 2012
Now that interest on debts absorbs nearly a quarter of British households’ net income, according to the Consumer Credit Counselling Service (CCCS), many families are discovering how cruel a taskmaster compound interest can be.
If you think conventional savings products – like pensions and managed funds – provide poor value, then just wait till you see how bad the ‘returns’ on borrowing are. While instant gratification has come to be regarded almost as a ‘yuman right’ in the credit-fuelled consumer societies of the developed world, the costs of that delusion will mount over the decades ahead. Worse still, the Government is actively encouraging young people to take on massive debts before they have any means of repaying them.
Even at today’s low rates of interest, debt that is allowed to accumulate on debt will often roll up faster than the debtor’s ability to repay it. For example, anyone who borrows £10,000 at a typical mortgage rate of 3.5 per cent will repay a total of very nearly £15,000 over the standard 25-year term.
Not many students today have heard of the ‘Rule of 72’ but more are likely to take an interest in future. This is the easy way of calculating how long it will take a debt to double; you just divide the annual rate of interest into 72 to arrive at the number of years. Albert Einstein is reported to have described compound interest as “the most powerful force in the universe” – and students in future could be forgiven feeling that questions about the accuracy of this quote are academic.