# Financial Learning Center

Introduction

Total Cost of Borrowing

This chart shows the total cost of borrowing \$20,000 at various interest rates and repayment periods.

 Interest Rate 5-Year Loan 10-Year Loan 15-Year Loan 30-Year Loan 3% \$21,540 \$23,160 \$24,840 \$30,240 4% \$22,080 \$24,240 \$26,640 \$34,200 5% \$22,620 \$25,440 \$28,440 \$38,520 6% \$23,220 \$26,640 \$30,420 \$43,200 7% \$23,760 \$27,840 \$32,400 \$47,880

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 1.0% b) Marginal Tax Rate 25.0% c) Multiply (a) times (b) .25% d) After-Tax Rate of ReturnSubtract: (a) minus (c) .75%
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