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Introduction

Total Cost of Borrowing

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

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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.