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dockidny | If 2 loans have the same interest rate but one has a higher balance, does it matter which you pay off first? |
Do you save more interest money by making additional principal payments to the bigger loan, or does it make no difference since the interest rates are identical?? Thanks! |
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Chris H
 |
As long as the terms of both loans are identical - IE, interest rate, variable versus fixed, penalty terms, etc, it makes no difference.
After all, 10% of 15,000 is still 1,500, despite whether it is broken up into two loans of $7,500, one $10,000 and one $5,000 or a single $15,000 loan.
But make sure the terms are identical - that is the key. |
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blueeyedcat28
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Pay the smallest first then you can add the payment from the smallest to the larger and get them both paid off and B debt free. |
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jjttkbford
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Well of all the answers above, no one got it right.
The payment is based on an amortization table. The amortization table if the loan is the same interest rate becomes determinate upon length of the loan.
They are correct in basic math that the interest paid on any amount is still the same percentage. What they are missing is how much of the payment is interest based on how much time is still left on the loan.
Pay off more on the loan that has the longest amount of time left re: the Amortization chart.
First payment on a 30 year loan at 8% will be mostly interest.
Last payment on the same loan will be mostly principle.
Adding principle payments decreases the length of the loan and lessons the interest owed (based on time)
Time is money. Amortization charts prove this.
Pay off the loan that has the longest amount of time still left to pay. |
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yumasaurusfirst
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Yes it matters you need to pay off the higher loan amt. because you are paying more in interest on that loan. You could consolidate the two loans into one. If you have an interest rate higher than 7%, decent credit and enough equity i reccomend refinancing. |
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Randy G
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Of course it makes a difference! Ten percent of $1000 is $100, while ten percent of $100 is only $10.
***Edit***
Come to think of it you are right -- it makes no difference. But it probably makes a difference on your credit score if you have fewer loans. |
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LARCO
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combine the two into one. it will lower your monthly payments.
you should pay off the one with the higher balance as you are paying more interest |
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Beek
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Nope, it makes no difference.
Say you have one loan at 7k and one at 3k, both with 10% interest. That's still 700 and 300 in interest per year. The same as it would've been for one loan of 10k. Without a payment, they would both accrue to 11k. No difference.
However, some folks see a benefit to paying the smaller first. First, it saves effort (and a stamp). Second, it offers a sense of satisfaction. Third, you may see benefits in applying for later credit when you can drop a card at leisure. |
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3eleven
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This is actually funny.......
1,000 x .10 = $100
100 x .10 = $10
1,100 x .10 = $110
It makes no difference which one you pay first.
Additional note: Mr. Economics professor, I believe we were all assuming that the loans were identical in term......a PHD in economics is not needed to answer this question Mr. Pedantic. |
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Aaronkun
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yes, the one with the higer balance will accrue more interest over time. For example, if I have $10,000 to pay off at say, 10% interst, then i wil have to pay a more money, $1,000. If I only have $5,000 though at 10% then I only have to pay an extra $500. IN other words, if you can pay off more money, do it soon, the sooner it is of your back, the less money you have to pay in interest. |
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Hope I can Help
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Yes! bcuz the amount of intrest paid is based on the amount of the loan. The % is based on the dollar amount. 10% of 1,000 is much more than 10% of 100. |
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bizsmithy
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As for your net worth, it makes no difference. You might pay the smaller one off first if you have a cash flow issue-the elimination of one payment would allow you to be more flexible, and hopefully you would pay off the bigger loan with it. |
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Rich B
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Technically no, but pay the smaller one off first. It'll give you a boost psychologically, plus when you have paid it off you can apply that payment to the larger loan. |
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flaquita
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not at all. At the end of the day, you will pay the exact same amount in interests. it does make a difference, though, if the interest is calculated on the balance due. 10%, let's say, of $1,000 is not the same as 10% of $10,000 |
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Chris P
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It makes absolutely no difference unless one is variable and the other is not. Then you would pay off the variable rate first. Some people like to pay off the smallest first because then they feel like they've accomplished something and are motivated to keep plugiging away. Hope this helps.
To answer the economics professor at the bottom....it doesn't matter if it is a simple interest loan. If they're not (most regular loans other than house are) then he's right. |
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Ren
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Yes it matters. Interest is charged on the loan amount. Therefore, the higher the loan balance the higher the interest rate charges. So, it's to your benefit to payoff the higher loan balance first. You will save interest rate charges. |
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