This was a puzzle / question I encountered earlier today and I found it quite interesting.
Suppose that you have a $2,000 loan which accrues 5% interest each month, and a separate $20,000 loan that accrues 3% interest each month. At the end of each month (after interest has been accrued) you have $2,000 in savings that you can use on one of the loans. Assume that interest accumulates before you make your payment. Also assume that if you have less than $2000 left on one of the loans, you can use the amount left after interest and paying it off on the other loan.
The question is: which loans should you pay off first in order to reduce the total amount of interest you accrue.
A follow-up question (which I don't have the answer to) is: what is the optimal strategy for paying off the debt to reduce the total amount of interest accrued, assuming that you can split your $2,000 between the loans each month (i.e. put $100 on one, and $1900 on the other).
Suppose that you have a $2,000 loan which accrues 5% interest each month, and a separate $20,000 loan that accrues 3% interest each month. At the end of each month (after interest has been accrued) you have $2,000 in savings that you can use on one of the loans. Assume that interest accumulates before you make your payment. Also assume that if you have less than $2000 left on one of the loans, you can use the amount left after interest and paying it off on the other loan.
The question is: which loans should you pay off first in order to reduce the total amount of interest you accrue.
A follow-up question (which I don't have the answer to) is: what is the optimal strategy for paying off the debt to reduce the total amount of interest accrued, assuming that you can split your $2,000 between the loans each month (i.e. put $100 on one, and $1900 on the other).
