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Everyday Cheapskate: Interest: A Great Mystery of Life, and More Q's From My Readers

Mary Hunt on

Dear Mary: I am university-educated and have an advanced degree in the arts. This is really embarrassing: What is interest? I just don't get it. -- Marty

Dear Marty: Don't worry. Your secret is safe with me. There are lots of things in the arts that I don't understand, so that makes us even.

OK, let's say you're a photographer. You have a big job offer, which will require you to borrow a camera. You'll have to pay a rental fee, figured by the hour or the day. The longer you keep the camera, the more rent you will pay. Interest is like rent on money you borrow.

Now let's say that, instead of you borrowing a camera for the day, you borrow $1,000 from your credit union. Each month that you do not return that borrowed $1,000, you must pay a kind of rent for using it, otherwise known as "interest."

By the time you repay the $1,000 after one year, at 12% interest, you will have paid back a total of $1,120.00 -- the $1,000 you borrowed plus the $10 per month interest (rent) for the privilege of using money that did not belong to you ($1,000 x 12% = $120 / 12 months = $10).

Reverse that process to see how you can earn interest. You own the equipment and rent it out to others, or you lend your money to others and charge them interest. Borrowers pay interest; lenders earn interest.

 

That's a simplistic way of explaining the principle behind paying interest. Hope it helps.

Dear Mary: Checks I sent through the mail to pay my bills were processed as ACH payments. I didn't authorize this and expected my checks to be handled normally, as checks.

Now I'm worried that when the checks do clear my bank, the money will be paid from my account again. Can companies just do this without customer authorization? -- Danielle

Dear Danielle: Welcome to the future. ACH refers to automated clearing house, a service that processes paper checks as electronic payments (think: debit card) the minute you hand that check to the merchant or, in your case, the moment it reaches its destination.

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