Is Interest Bad?

It occured to me the other day that there is a stigma to paying interest. Putting something on a credit card and paying interest on it over a period of so many months is often considered a poor financial decision. Likewise, many people think that the finance guy at a car dealership is ripping the customer off when they lower the monthly payment by extending the term of the loan. Is this the right attitude to have? Is paying interest unwise and charging interest evil?

Certainly, it is always better to be able to pay for things outright. No one would dispute that if you have the money to buy the 2000 dollar television, you should just buy it instead of putting it on the Visa. Likewise, if you can easily buy a car in cash, it would not be smart to finance it. If everyone always had the money they needed when they needed it, interest wouldn't exist. As it is, however, most people do not always have all of the money they need. Most people, from time to time, feel the need to borrow.

So, is it wrong for lenders to take advantage of borrowers by charging interest? No. No one should be obligated to lend their own money just to satisfy someone's need for instant gratification. The lender charges interest--interest being the amount that makes it worthwhile for the lender to temporarily give up his or her own money. Interest, to the borrower, is the amount he or she is willing to pay in order to have now what could instead be had later. In other words, when we buy a car and pay interest, we are in reality paying for the benefit of getting the car immediately. When we buy the TV and pay off the Visa card in six to eight months, we are willing to pay a couple hundred dollars interest because we want to watch the TV now!

Interest is neither or good or bad. It simply is. It's just another item available for purchase in a mutual transaction. Certainly, anyone can get through his or her life without ever paying interest, but he or she will most likely rent a house, walk to work, and have no college education. Financing a good or service may never really be a need but it may be a bad enough want to justify shelling out some interest.