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0 pointsChicagoDave1y ago0 comments

Take any loan/credit and stretch it out until it’s paid off under the current parameters. You can calculate total interest paid.

Now add an extra column to pay extra (against the principal).

Now calculate total interest paid. Save this separately.

Now the fun part. Go back to the original and adjust the interest rate until the total interest paid is the same as the adjusted version.

You just found a way to reduce your interest “rate”.

0 comments

abenga1y ago

There is the "debt is bad" viewpoint, where paying your loan earlier is seen as a good thing, which is a valid way to look at it, depending on your values.

However, what you described can also be done this way: invest the extra payment amount elsewhere and get interest/capital gains on it, which gives you the lower effective interest rate and the extra liquidity as well. Or in other words, the figures on the spreadsheet need to reflect the opportunity cost of the extra payment, or the lower total interest paid is a misleading mirage.

ChicagoDaveOP1y ago

There are definitely levels of sophistication in managing interest liabilities. If you have a mortgage at 3%, paying the principal early is wasting your extra monty. As you said, you can invest the extra and make 7% (hypothetical) and clearly that’s advantageous.

My example is for people struggling with credit cards and high interest loans that don’t have investment properties.