RE: Loan Interest Payment Puzzle / Question
May 5, 2017 at 2:16 pm
(This post was last modified: May 5, 2017 at 2:17 pm by pocaracas.)
(May 1, 2017 at 4:50 pm)Tiberius Wrote: 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.
If we can use those $2,000 in monthly savings any way we want, maybe there's a better way than using it all in one or the other loan... maybe a 3/5 to the higher interest loan and 2/5 to the lower interest one?...
Google sheets for quick and dirty spreadshiting:
https://docs.google.com/spreadsheets/d/1...sp=sharing
I tried to start both loans at the same level of 20k...
Interestingly, I was wrong... It's always better to pay off the higher interest loan, while the other just accumulates interest... provided you don't get prosecuted for not paying that other low interest loan.
(yeah yeah yeah, the spreadshit isn't perfect... sue me! I did it in 10 or 15 minutes and tried out a few combos)
(May 1, 2017 at 4:50 pm)Tiberius Wrote: 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).
oh look.... that's what my alpha value does... I knew I hadn't invented it!
An alpha of 1, makes you spend everything on loan1 first; an alpha of 0 makes you spend everything on loan2 first...
My spreadshit doesn't work so well when you pay off loan2 before loan1.... there's no check for it... and I think I might enter the realm of circular referencing if I try... so... meh.
Anyway, you pay the least amount of interest for alpha=1, so paying everything on the highest interest loan.
