RE: Loan Interest Payment Puzzle / Question
May 2, 2017 at 8:11 pm
(This post was last modified: May 2, 2017 at 8:24 pm by bennyboy.)
Instead of thinking of the individual debt values or trying to calculate the total interest in different scenarios, you should think more of the value of the payment money for a clear answer to the question.
If I gave you two savings accounts paying 5% and 3%, where would you put your money? Obviously, the 5%.
Now, if you think of your payment as compounding negative debt (read: savings), things should look clear: NO MATTER WHAT, given limited funds, you will most benefit by putting your money wherever it is most magnified by the interest rate. Pay off the 5% debt first-- and it doesn't matter whether it's for $1 or $1 million.
Good point. I have some government-underwritten low-interest loans (like 1%). Those will be paid off as soon as I see pigs flying in front of the bank, because if I can't make at least 10% a year on my money, I don't deserve to have ANY.
If I gave you two savings accounts paying 5% and 3%, where would you put your money? Obviously, the 5%.
Now, if you think of your payment as compounding negative debt (read: savings), things should look clear: NO MATTER WHAT, given limited funds, you will most benefit by putting your money wherever it is most magnified by the interest rate. Pay off the 5% debt first-- and it doesn't matter whether it's for $1 or $1 million.
(May 1, 2017 at 6:21 pm)Cthulhu Dreaming Wrote: My financial planner has always advised me to always pay down higher interest rate debt first. That may not be strictly mathematically correct, however.
Also - as I can pretty reliably get significantly better than 5% ROI, I wouldn't exactly be in a big hurry to pay either off, compared to investing.
Good point. I have some government-underwritten low-interest loans (like 1%). Those will be paid off as soon as I see pigs flying in front of the bank, because if I can't make at least 10% a year on my money, I don't deserve to have ANY.
