Bank of America is ready to repay TARP, and is planning on doing it in the next few days. While Bank of America has not been a paragon of good decisions in the past, it is possible to learn a few valuable lessons from this latest move by Bank of America. Here are some things you can learn about debt from Bank of America:
- Paying off debt gives you more freedom: The TARP loans came with strings attached. Now that Bank of America is paying off the debt, it is free to do what it wants in terms of executive compensation. The same is true of your your own debts. When you are in debt, you are encumbered with restrictions on what you can do with your money. Paying off your debt frees up more money for you to use as you would like.
- There is always a price to debt: While Bank of America was able to get reasonable terms by getting loans through TARP, there were still costs. Bank of America had to issue warrants to the government and still had to pay interest on loans — not to mention the non-money price of being more accountable to the government and the people. Likewise, there is always a price to your own debt. You have to pay interest, fees and you might pay in other ways as well, including feeling more stress and worry about money, and stress in your relationships.
- When you pay back debt, your honor is intact: Fulfilling your obligations is a sign of honor. For Bank of America, it means that maybe some CEO (since Ken Lewis retires on Dec. 31) will be willing to step up. It also provides shareholders and the public a sense of confidence in Bank of America. The same is true for you. When you repay your debt, your credit score — your financial reputation — is enhanced. And, of course, your friends and family can see that you are a person of your word.
In the end, it is better to avoid debt. But if you are in debt, you will find that paying it off as soon as possible (even if you can’t do it over the course of a few days like Bank of America) will lead you to more freedom, lower costs, and a general feeling of financial wellness.