After recently buying my new car, I admit I actually didn’t know how much my minimum payment would be on my line of credit that I used to pay for it. So I just got the statement yesterday and I was shocked on how low the minimum payment was: $50 per month. Pardon?!? Did someone screw up the math on this one? At that low of a minimum payment I’m not even covering the interest each year. If someone kept doing that you would never pay it off.
So what’s the problem here? Well I suspect the issue is when my line of credit was setup in the first place I didn’t pay much attention to the payment options and the bank checked off the option of interest payment only. Because I only borrowed the money for half a month I haven’t actually hit the full amount over $50, so hence the insanely low minimum payment for the first half month. Next month I will likely owe at least the interest due or just over $60.
Yet with such low payments it becomes easy for people to think that a payment of like $100 month would be ok. When in fact that low of a monthly payment it will take 23 years to pay off my car. Sort of defeats the purpose of the loan if the asset I bought with is long gone before I pay off the debt. What happens if the minimum payment is pushed up to 1% of the balance or $185 a month? In that case the loan is paid off in just over 9 years.
The fact I can choose interest only payments is rather insane to me. Granted I’m a responsible borrower, but it would be nice for the government to look out for people that don’t think about money as much as I do. After all with all these warnings about our debt, it would be nice for the government to suggest something simple. Change the line of credit rules to make all minimum line of credit at least 1% of current balance. Yes that would drive up a LOT of people’s payments, but in fact it might cause some of us to at least think a tiny bit more about what we can afford.
So what do you think? Should minimum payments for debts be higher? Or is that turning us into a ‘nanny state’?