Author Topic: Loans- Large Amount w/ Low Interest vs Small Amount w/ High Interest. Help!  (Read 2956 times)

WheelPage

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My goal is to pay the less amount of interest at the end of all of this. What would you recommend? I have 15k to drop into any of my Loans. My idea would be to drop all of that money into the largest sum of money instead of the smaller ones. It would seem I would pay a lot less with that method.

How much I owe from each loan. [MP: Monthly Payment] [IRN: Interest Rate from Now *How much I have to pay in interest from this point forward.]
A. 5.8k @ 6.80% [MP:$101.76] [IRN:$1,224.35]
B. 1.6k @ 6.80% [MP:$50.00]   [IRN:$170.43]
C. 5.0k @ 5.95% [MP:$84.35]   [IRN:$935.12]
D. 3.0k @ 6.80% [MP:$51.87]   [IRN:$645.31]
E. 70k @ 5.65% [MP:$712.79]   [IRN:$24,175.10]
F. 14k @ 4.25% [MP:$135.89]   [IRN:$3,448.04]

My options would be the snowball method or killing the 70k loan off first. Wouldn't it be better to drop 15k into the 70k loan than paying off the smaller top four loans?
70k - 15k = 55k @ 5.65% [IRN:$13,507.10] This would be the interest with the 15k deducted.
Thus [70k loan IRN:$24,175.10] - [55k loan IRN:$13,507.10] = $10,668 would be different.
I would get to pay less than $10,668 if I put the 15k into the 70k loan. This is huge.

Or the snowball method.
If I kill off the top four loans, their interest from this point on would equal $2,975.21. That's an enormous difference of $7,692.79. [$10,668 - $2,975.21 = $7,692.79]

Please let me know if everybody can understand my question and my math, does it check out correctly? This was the website I used to calculate the final interest amount. bankrate

Also, one more question. Do you have any recommends on finding or reducing interest rate. I am having difficulties with this and it's killing me. :/
Thank you so much for reading this huge wall of text. All advice is welcome and greatly appreciated.

lizzigee

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Pay off ABCD. BUT, then you need to KEEP putting each of the loan repayments you were paying towards these now paid off loans into your next highest interest loan.  This how snowballing saves you paying so much interest.  Its not just about a one off payment, it's the accumulating effect of making all those extra payments towards other loans.
« Last Edit: November 29, 2014, 01:25:30 PM by lizzigee »

Frankies Girl

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What lizzigee said. Pay the higher interest ones first and you'll wipe out all four of those. THEN you roll the minimum payments for all four of those onto your 70K payment - making your new monthly payment 1,000/mo.

Paying 15K towards the 70K loan (which makes it a 55K loan @ 5.65% with a minimum payment of $712):
Under the proposed payment terms it will take 97 more payments or 8.1 years to pay off the remaining balance. Interest will amount to $13,527.
And that is only if you don't drop your minimum payment down - some loans will recalculate your "minimum payment" at least once yearly and they may drop the MP based off of the principal owed, but if you allow yourself to reduce the payment to match what they say, you'll be back to paying even more interest over an even longer time period again.

Pay off loans A-D, apply their minimums to the 70K loan (for $1K/month minimum payment):
Under the proposed payment terms it will take 86 more payments or 7.2 years to pay off the remaining balance. Interest will amount to $15,125.


http://www.calcxml.com/calculators/pay-off-loan

If you can increase the payment towards the 70K one (throw as much extra $ as you can) then you'll get that reduced even faster and with less interest paid. And it should go without saying that you'll keep making the minimum payment on that 14K loan as well.
« Last Edit: November 29, 2014, 07:41:27 PM by Frankies Girl »

WheelPage

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I find this interesting. I swore I was correct in my assumption that putting 15k into the 70k loan with of course paying the minimum payments on all loans would be the right choice, because the interest would be way less than paying off A,B,C,D loans first.

However, you two are correct. That would be my plan if I wasn't paying off the 70k one right off the bat. I would like to pay off the highest one first as fast as possible by paying double or more. And then move that type of payment over to the next highest and so further.

However, is there a tool to calculate multiple loans over a extended amount of time like this? Any idea? Thanks for the replies guys. This is an eye-opener.

Wanderlusting

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if the above calculator doesn't work, try unbury.me . It's a simple site but you can see the difference between the two methods, and adjust monthly payments etc, so with a bit of legwork i'm sure you can see which method works for you.

kpd905

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If it helps, think of loan E as 70 separate loans of $1000 each at a 5.65% interest rate. 

Now loan D is 3 separate loans of $1000 each at a 6.8% rate.

If you have $1000 extra to pay toward them, where should you put it?

WheelPage

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Thanks guys! Going to kill the higher interest loans and snowball it up to the larger loans.

MDM

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You could check this thread, http://forum.mrmoneymustache.com/ask-a-mustachian/spreadsheet-to-test-different-debt-payment-scenarios, and the spreadsheet available therein.

It should support your plan to kill the higher interest loans.

Good luck!