RE: Loan Interest Payment Puzzle / Question
May 5, 2017 at 10:16 pm
(This post was last modified: May 5, 2017 at 10:20 pm by bennyboy.)
(May 5, 2017 at 2:16 pm)pocaracas Wrote: 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.
That's because ALL effects under the umbrella of that interest rate are magnified-- debts, payments, savings, withdrawals, whatever. It's strange that debt payment is so confusing, because with all other ways of dealing with money, things seem very clear.
Savings: If you had a 3% and 5% savings account, you'd ignore the 3% totally and put money in the 5%.
Withdrawal: You'd definitely withdraw money from the 3% savings account first, because the 5% one benefits you more.
Debts: Given the choice, you'd choose a 3% loan over a 5% one.
Payments: this thread and a lot of ??? But no, it really is this simple: your payment's value ALSO compounds at 5%. So your $1000 payment eventually has a value of $1050, and so on. I guess people don't consider this because it's kind of a "negative space"-- we can't intuitively understand "compounded interest that is lacking from the debt."
Maybe THIS idea should put this all to rest: if you could borrow MORE money at 3%, should you? Of course-- you'd use it to pay off the 5%!
