Save First or Borrow? The True Cost of a $600 Bike

0:00A bike costs 600 dollars. Save up first, or borrow and buy it now?

0:07Option A: save 50 dollars every week.

0:11600 divided by 50 is 12, so it takes 12 weeks. Check: 12 times 50 is 600.

0:20At week 12 you buy it. No loan means no interest, so the total cost is 600 dollars.

0:28Option B: borrow 600 dollars for 1 year and buy the bike today.

0:35The amount you borrow is the principal. Interest is the extra money you pay the lender for the loan.

0:42Simple interest is charged on the principal only: interest equals principal times rate times time.

0:50The rate is 12 percent a year, which is 0.12, and the time is 1 year.

0:57600 times 0.12 times 1 is 72, so the interest is 72 dollars.

1:05You pay back 600 plus 72, which is 672 dollars in total.

1:12In 12 equal monthly payments, that is 672 divided by 12, or 56 dollars a month.

1:21A common mistake is comparing only the payments: 56 dollars a month looks easier than 50 dollars a week.

1:30Compare the totals instead: 672 minus 600 is 72, so borrowing costs 72 dollars more, exactly the interest.

1:42So you choose: wait 12 weeks and pay 600 dollars, or ride today and pay 72 dollars more.

1:51Borrowing is faster, but interest makes it cost more. Always compare the total cost.