Total Debt Service Ratio - TDS

and finance Allah shmoop What is a P R old

Even pirates know nothing worth anything in life is free

But unlike in G olden days of pirate lore where

you'd have to steal to get more money in the

bank well you can actually rent money today For instance

a mortgage a car loan a credit card They're all

forms of renting money taking on debt in exchange for

some interest in you know paying for that debt or

renting it But setting up alone includes other costs Like

you know when you buy a house you have to

pay a closing costs You have to pay to be

sure there's no mold on the wall and you have

to pay to be sure there's a proper title to

the house so no one claims ownership to it in

a whole bunch of other expenses and fees that come

in there Well somebody's got to pay those inspectors the

title Dudes you know the home underwriters That's why we

like a PR I annual percentage rate which takes into

account the interests you'll be paying until the loan is

repaid and all those other costs and fees right so

a PR basically tries to roll in everything so that

you get the gross cost out of your pocket not

just one sliver of some of the costs It's going

to take you to buy whatever it is you want

to buy Well a PR combines all the cost the

borrower of alone will be facing An average is them

over The term of the loan is a percentage right

so it grosses up the percentage to match reality But

when you look at buying a new car house or

a researching credit cards you'll probably notice two rates the

A p R And the interest rate to different things

where the interest rate is the interest you'll be paying

on the loan on Lee will each month You make

payments to pay the loan back with well in the

beginning most of it being interest that you're paying And

gradually you worked down the principal until it you know

goes away and there's nothing really a PR shown will

be higher because it wraps the interest rate in with

all the other fees So you get a better idea

of exactly how much this is really going to cost

you Well the A p R is your best friend

When you want to know Are these guys ripping me

off For what When your comparison price shopping like between

two different credit cards or mortgages while a PR will

tell you which one will actually cost you less Overall

if one company has lower interest rate about hire a

PR than a number well it means there's hidden fees

and charges all the time They're going to hit you

for that money And yes those charges will hurt If

a company keeps pointing to its low interest rates asked

them for the a p r to get the real

measure of that cost comparison right Well with mortgages in

particular you have the option of hey those extra costs

upfront or you can wrap some of them into the

loan itself which means you'd be paying those fees off

just like you're paying off the principal balance Well some

types of loans come with lots of fees like mortgages

like points up front all kinds of their taxi things

and some with fewer like credit cards Like more competitive

They're kind of simpler but whichever type alone you're signing

up for Remember a PR is usually calculated with simple

interest rather than compound interest Simple interest grows linearly over

time little by little Compound interest includes interest on top

of interest It grows a whole lot faster over time

Well this is important to think about since some loans

Yu's compound interest like credit cards and some use simple

interest like mortgages Let's say you get a credit card

with an 18% interest rate and you go hog wild

buying rum and gold and then a tropical island the

size of your bathroom racking up 500 grand in credit

card debt Well that debt will grow in a calm

pounding rate Not only do you owe interest on the

principal amount the amount borrowed but you'll also end up

owing Maur the interest on the interest you just haven't

paid yet Every month your credit card company calculates how

much you owe them in total not based on that

500 grand you initially borrowed But on that 500 grand

principle pull us any unpaid interest to date So let's

just see how big compound interest is compared to simple

interest and we're getting to the whole notion of a

PR here Your 500 grand of credit card debt with

18% interest It would take you over 15 years to

pay off if you paid in aisle 7 800 bucks

and change for months with calm pounding interest you'd end

up paying a 6,688,000 and change Yeah you borrowed half

a mil and ended up going over 6.5 mill If

credit cards were simple interest like mortgages well then in

the same situation you'd only end up paying 1,000,000 9

That just under 2,000,000 for borrowing that half of interest

very expensive There's a reason the bank executives have really

nice jets So you ended up paying six point $5,000,000

total in interest and principal with calm pounding interest and

only one point 9,000,000 with simple interest Well when you're

using a PR is you got to remember that number

is using the simple interest calculation If you get a

credit card and rack up calm pounding debt which you

will if you don't pay it off in full every

month well then you're gonna go a whole lot more

money to your credit card company than the A P

R would have had you believe when you signed up

for it And you know about that island there Give

backs island buying maybe and