This chart shows the total cost of borrowing $20,000 at various interest rates and repayment periods.
As you can see, borrowing can be costly, especially if you take out a long-term loan. It is important to look at other alternatives to borrowing before making a final decision.
Before you borrow, you should compare the after-tax interest rate you are earning on your assets to the after-tax interest rate you will have to pay to borrow money. For example, suppose you have the $20,000 you need in a savings account earning 1% interest. After paying taxes on your interest (e.g., at a rate of 25%), you are really earning an after-tax rate of 0.75%. Unless you can borrow money at an after-tax rate below 0.75%, you'd be better off using the money in your savings account (unless it is your emergency fund). See the following illustration of how this after-tax interest rate is arrived at.
a) Current Interest Rate
b) Marginal Tax Rate
c) Multiply (a) times (b)
d) After-Tax Rate of Return Subtract: (a) minus (c)
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