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What holds people in poverty? Daily Compounding Interest.
The crux of almost all poverty among people with jobs is the inability to buy things they need without paying exorbitant interest rates. Most lower-income, and many middle-income earners pay much more interest on the things they buy than people who make more money. It’s a pretty stark contrast, to be honest.
Anecdotally, in my life I have had periods of low income where the only loans I could get came with APR that was 3x or more the APR of a person with a “normal income” would pay. That means I have less buying power up front, which usually means buying lower quality products (such as an older used car) than what someone with a higher “credit rating” would be able to buy. With lower quality comes reduced useful lifespan of the product, thus necessitating another high-interest car loan, often way before the first one is paid off. It’s called going upside-down, and once it happens, it’s very, very hard to get out from under.
Sometimes stuff happens and we need some extra money. If you have good credit you can get a loan from your bank in minutes and pay a tiny interest amount. But what if your bank won’t loan to you? Welcome to the world of short-term lending! Interest rates range from 50% to 600% depending on the amount borrowed and the lender. Sometimes lenders will snag prospective borrowers with “low interest rates” (think 250% instead of 500%), only to add hundreds of dollars a month in “Customary Fees” on top of the interest that doesn’t positively affect your principle balance. For example, a $1000 loan from Blue Sky will cost you $680 per month… for six months.
When buying a house, those with lower incomes typically have to finance on a 30 year term instead of a more aggressive 15 year term. Even if the interest rates were the same between these loans (they are not, btw), you would be paying much, much more in interest than double the 15 year loan. Now, throw in the fact that 30 year mortgages almost always carry higher interests rates…. It gets out of hand quickly. Unless you plan to live in a house through the full term of a 30-year mortgage, you will not really see any tangible benefit financially over renting until about 20 years into the mortgage. When you factor in insurance, taxes and upkeep, the difference between buying and renting becomes even worse.
