This was a draft. The final version is now available as a pay-what-you-want self-published book called Tom’s Finance Guide: Retire Rich!
This is actually an anecodote about high interest rates.
I remember being very young, perhaps 9 years old, and hearing the term “loan shark” on television. I asked my father what that meant.
He explained it to me in the way that a 9 year old would understand. He said, “You know how banks make loans to people to buy houses and cars? Well, some people make loans too. Its called a private loan.”
My 9 year old brain could understand that.
“So why is it illegal?”
See, I may have been 9 years old, but I understood what was going on in that TV show.
I’m not sure why my father didn’t say “if you don’t pay them back, they’ll break your legs”. Maybe he though 9 years old was too young to hear that. Or maybe he did say that but I don’t remember.
What I do remember is that he said that they charge a really high interest rate… like 100%. Completely unethical. You borrow a thousand dollars and you might have to pay back two thousand dollars.
100% interest rate seemed rather unethical to my 9 year old mind. I realized that people that go to a loan shark must be pretty desperate if that’s their only choice.
Fast forward 15 years and I’m about to make my first real estate purchase: a condo in Bridgwater Township, New Jersey. It was a 30-year mortgage at what I thought was a good interest rate. However I built a spreadsheet to see how much interest I would pay… total. In those 30 years those tiny little interest payments really added up. In fact, it was more than the cost of the condo!
Wow, if loan sharks are unethical because they charge 100% interest, what does it mean that over 30 years I’ll be paying 150% (total) interest?
Banks aren’t your friend. No matter how much the talk about being your partner, remember that this is a two-sided business relationship.