💰 Money
💳Debt and Loans
Borrowing feels easy until interest grows daily — compound interest, working in reverse, rolls your debt into a snowball.
Simple and compound interest delivers the good news about saving: interest earns interest, and the snowball keeps growing. Sadly, the snowball law plays no favorites — when it is your turn to owe, it works just as hard, only in reverse: what swells is not your savings but your debt.
Principal and interest, read backwards
Money borrowed is the principal; the price paid for using it is interest. When you save, the interest goes to you; when you borrow, it goes to the bank. On a debt of 10,000 yuan at 20% a year, one year of interest is yuan — you did nothing at all, and the debt grew by two thousand. The interest rate is the price of borrowing, and comparing that single number is the cleanest way to shop for a loan.
Compound interest in reverse: the credit-card cycle
Paying only the minimum on a credit card is the most dangerous habit: the unpaid balance keeps drawing interest, the interest folds into the debt, and next month the whole thing rolls together — compound interest, working for the bank. At 20% a year, compounded, a 10,000-yuan debt turns into:
- After 1 year: yuan;
- After 3 years: yuan.
In under three years the debt grows by more than seventy percent; by the rule of 72, a 20% rate doubles the debt in about 3.6 years.
Simple
15,000
Compound
16,289
Compound earns extra: +1,289
Drag the rate up and the years out, and watch how far the solid compound line pulls away from the dashed one. The "extra" gap that thrilled you while saving is exactly the extra you repay while borrowing.
Equal payments: every installment hides interest
The usual way to repay a loan is a fixed amount each month, and each payment has two parts: one covers interest, the other pays down principal. While the balance is large, interest takes the lion's share; as the principal shrinks, the interest shrinks with it and more of each payment goes to the balance itself. That is why paying early — or paying extra toward principal — saves far more interest than intuition suggests.
What if you only pay the interest?
You owe 12,000 yuan at 1% per month, so the monthly interest is yuan. If you pay exactly 120 every month, the principal never moves — the 12,000-yuan debt never shrinks. Interest behaves like rent: paid month after month, and the debt stays exactly where it was.
Save first, spend later
The best weapon against debt is never carrying it: for something you want, save up first and buy it when the money is there — not a cent of interest, and the saving habit gets stronger too. The 50/30/20 rule from the lesson on budgets exists precisely to reserve a slot for saving first. If a loan is truly necessary (a house, say), read the fine print on the rate before signing — monthly and annual compounding differ more than you would think; see periodic compounding and APR.
Credit is an asset too
Paying on time does more than save money — it builds your credit. One missed payment goes on the record, and the next loan will come with a far less polite rate.
Check yourself
Quick quiz
1. A debt of 10,000 yuan at 20% a year sits unpaid. At compound interest, how much is owed after 3 years?
2. What happens if you pay only the minimum on a credit card every month?
3. You owe 12,000 yuan at 1% monthly interest and pay 120 yuan each month. What happens to the debt?