Loan Interest Payment Puzzle / Question

[Tiberius]

I'm just sitting here like dude... I work as a loan assistant at a bank... pay off the smaller one cause I said so.

Y'all bring out the math and proof. lol

Depends whether the loans you assist with are given by the bank. Banks want you to pay them off slowly so they get more money via interest.

[mlmooney89]

I'm just sitting here like dude... I work as a loan assistant at a bank... pay off the smaller one cause I said so.

Y'all bring out the math and proof. lol

Depends whether the loans you assist with are given by the bank. Banks want you to pay them off slowly so they get more money via interest.

Oh I was just laughing that I wasn't helpful despite my field of work and y'all were and even had proof.

[Tiberius]

Hehe I know I was mostly just making a joke

[mlmooney89]

Y'all should know better than to joke with me. I don't get social cues in person nevertheless online :p

[Tiberius]

I don't get social cues in person nevertheless online :p

Of course you don't, you're a loan assistant.

*ba dum tish*

[GUBU]

I'm just sitting here like dude... I work as a loan assistant at a bank... pay off the smaller one cause I said so.

Y'all bring out the math and proof. lol

There's all sorts of reasons why you'll pay up one loan before another given tight circumstances. Interest differentials is one, principal is another, and a third one I can think of is who you're loaning from. For example if I've a 5% loan from the bank and a 7% one from my credit union, I'm a lot more likely to look for longer terms or a payment holiday from the CU because they tend to be a lot more patient with debtors (for many reasons including the fact that I'm a part owner of the institution and that it's a non-profit community investment organisation) and more likely to give a better deal to those with a genuine need, whereas the bank will use the full extent available to them under the law (especially against small fry like me).

Luckily though, I've never had a loan that I've either not paid on time or in advance.

[mlmooney89]

Oh I know there are stipulations and reasons to look at every loan differently but I was going off what Tiberius told us. I'm actually really good with money. The only thing that I owe money on that has interest is my truck and that's tens of thousands of dollars so I'm not working on getting it down. When my husband and I got married in September I took over his bills and he had $32k in student loans. By March he had $25k. I managed to pay off one of the loans and I'm about to pay off another.

[TheRealJoeFish]

So, without looking at anything but OP, I think I've got the answer to the initial problem:

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You make your first month's payment on the small loan, then make the next 12 months' payments on the big loan, until after the 14th month there's $1,016.21 in the big account and $188.56 in the small account. Total payment $27,204.77. Now to check if that's right!

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The second problem I want to think about some more.

Edit: don't know if my solution to the first one's allowed. I thought you could alternate months. I agree that if you have to choose one loan, pay it off entirely, and then pay the other one off, you pay the smaller one first. Because if you pay off 2000 on the small one, you're saving yourself $100 (and interest thereon, and so on) going forward. If you pay off 2000 on the bigger one with the lower rate, you're saving yourself $60. This is basically what CD was saying intuitively.

[Tiberius]

Even if your first solution is allowed (and I didn't anticipate flipping between loans when repaying them), it seems that paying off the smaller loan first is still advantageous.

You spend $27,166 total paying off the loans if you pay the $2k loan off first and then the $20k loan.

Using your method you spend $27,204 which is more.

It seems more and more likely that the optimal solution might be just paying off the smaller loan completely first, because compound interest of 5% really adds up after several months. I'm just not sure if any kind of split payment method would be better in terms of interest.

[TheRealJoeFish]

Ah yes you are right! I didn't calculate right, and then I put the right calculation into my "answer" but preserved the incorrect calculation in my head!

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Yes, and I misapplied what CD said too - switching shouldn't matter, because if you leave 100 in the small account, you're getting charged $5 (compounded) on that every month, whereas any $100 portion of the big account is costing you only $3 per month.

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So, yes. I agree. And then I think you've answered your other question too - even if you can split funds, still just pay off every high-interest dollar before any low-interest dollar.