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I'm terrible at math and can't decide which student loan to put money on next

NanaNana Fuzzy Little YetiRegistered User regular
edited February 2012 in Help / Advice Forum
I have about $3000.00 to put down on a loan and I am picking which loan to pay down next, I have 2 choices:

I have a $3,005.66 loan at 4.25%
and a $6,734.54 loan at 3.25%

I want to save the most money, my terrible math skills tell me that putting the $3000.00 down on the larger principle loan will save me more money. My husband isn't sure that is the case.

My plan was to put $3000.00 on the 3.5% loan, then pay down the 4.25% loan.
Am I wrong? Would putting the money on the 4.25% loan save me more money?

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    NanaNana Fuzzy Little Yeti Registered User regular
    I have it figured that

    4.25% of 3,005.66 is $127.74
    3.25% of 6,734.54 is $218.87

    So I am paying more interest on the 3.25% loan.
    I'm just not sure if I'm looking at this situation the wrong way.

    3DS Friend Code: 3823-8688-4581
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    NanaNana Fuzzy Little Yeti Registered User regular
    Ok I did more digging and came up with this:

    4.25% loan began accruing interest on 12/28/06 and has accrued $421.92 of interest since then.
    3.25% loan began accruing interest on 9/20/07 and has accrued $460.58 of interest since then.

    When comparing the loans both principles and interest, I see the 3.25% loan as more of a 6.50% interest loan (since the principle is double the other loan).

    My husband thinks paying the higher interest loan is always the right decision.
    I think if you had a 3% loan on $10,000.00
    and a 5% loan on 1,000.00, wouldn't putting money on the 3% loan make more sense?

    3DS Friend Code: 3823-8688-4581
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    DaenrisDaenris Registered User regular
    edited February 2012
    You have an amount of money that is basically enough to completely pay off the higher interest loan. Pay off that and then put any amount that you were paying towards that every month on the remaining loan to pay it down faster.

    Edit: What are your minimum payments on each loan (or what are you paying per month on each if more than minimum)?

    Daenris on
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    mrt144mrt144 King of the Numbernames Registered User regular
    The higher interest is almost always a better idea unless you can pay off the lower interest in full I one fell swoop, thus freeing up more money to pay off the higher interezt.

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    NanaNana Fuzzy Little Yeti Registered User regular
    Daenris wrote:

    Edit: What are your minimum payments on each loan (or what are you paying per month on each if more than minimum)?

    Minimum payment on the 3.25% loan = $55.95 Accrued borrower interest: $11.39
    Minimum payment on the 4.25% loan = $26.43 Accrued borrower interest: $2.03

    I basically pay minimum one month, and then minimum plus $2,000.00 - $3,000.00 (what ever I manage to put aside) the next month.
    Last year I was paying minimum plus $2,000.00 every month, but that was too stressful/draining to keep up with.

    3DS Friend Code: 3823-8688-4581
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    DaenrisDaenris Registered User regular
    There may be better tools out there, but you can plug your numbers into this:
    http://cgi.money.cnn.com/tools/debtplanner/debtplanner.jsp

    And it will tell you the interest you'll pay. So just test by knocking $3000 off one or the other -- it confirms that you'll pay less interest in the long run by paying off the higher interest loan first (if you just pay $3000 now and then pay those minimum payments for the rest of the life of the loans you'd save about $130 in total).

    Although, if what you're saying is that you have $3000 now and will have another $2000-3000 every other month, then you're talking about having both loans completely paid off in about 4-6 months, so it's really not going to be much interest at all either way.

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    ToxTox I kill threads he/himRegistered User regular
    edited February 2012
    As a generally rule I make extra payments thusly:

    1) Can you pay at least 90% of the total amount due of any one bill?

    2) Which bill has the highest interest rate?

    Yes, your husband has a semi-valid point in paying toward the larger total bill. However, you can very nearly eliminate one whole bill with this money. You should do that, and I would do that, even if it happened to be the lower interest bill, because it reduces your overall number of bills. While it may not be the most economically advantageous decision, it improves your credit by having one whole loan completely paid in full. Plus it feels good to be able to say you've paid off a loan.

    Tox on
    Twitter! | Dilige, et quod vis fac
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    NanaNana Fuzzy Little Yeti Registered User regular
    Daenris wrote:
    There may be better tools out there, but you can plug your numbers into this:
    http://cgi.money.cnn.com/tools/debtplanner/debtplanner.jsp

    And it will tell you the interest you'll pay.

    Thank you, that calculator is exactly what I was looking for.
    I agree with you, that no matter which loan I pick, I won't really be saving a substantial amount since both loans will be paid off within 6 months.
    How loans work is a bit of a mystery to me. I'm just trying to understand more how my loans are accruing interest, and if it could be more beneficial to pay down a lower interest loan.

    I've been reading a lot of terrible financial advice online such as "flip a coin" or "pay the smaller balance first!", so I guess understanding loans/debt is confusing for a lot of people.

    Thanks again!

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    EsseeEssee The pinkest of hair. Victoria, BCRegistered User regular
    Yeah, I would think if you can spare the extra $5.66, getting rid of one loan entirely would be the better bet. Not only are you paying your higher-interest loan, you're also totally eliminating interest payments for that loan.

    EDIT before actually posting: I see you've added more information about your situation while I was typing... Go ahead and do the calculations for this stuff using the way you actually pay, but I think the following information is still accurate since it's just about how much you would be paying in interest in general.

    I went ahead and did some calculations like yours... If you DO pay off that higher-interest loan entirely, you're saving the $127.74 in interest you were paying (and will pay) on that loan, so your interest is $218.87. If you instead pay down the other loan like you were thinking, your interest will be $127.74 from the higher-interest loan plus $121.38 from the lower-interest loan (3.25% of $3,734.54 if you pay exactly $3000 like you said) for a total of $249.12. That means unless something changes and you pay down that loan using more than the $3000, you're not actually getting the savings you'd expect from doing things that way. (This may be different depending on how your minimum payments work, I suppose... go use that calculator that was posted to see exactly how much you'd save.)

    I mean, if I'm missing some crucial thing to add to my calculation here, do let me know (I've never actually accrued interest or made minimum payments before at all, to be honest)... but at least from the point of view of "how much money in interest would you owe" paying off the smaller loan completely seems like the better option!

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    khainkhain Registered User regular
    Nana wrote:
    My husband thinks paying the higher interest loan is always the right decision.
    I think if you had a 3% loan on $10,000.00
    and a 5% loan on 1,000.00, wouldn't putting money on the 3% loan make more sense?

    Your husband is always right and putting money on the 3% loan in the above situation doesn't make any sense if you are trying to minimize interest payments. The problem you're having is that you aren't comparing equal amounts of money. Take your second post for example, you say your paying more on the 3% loan but that's because the 3% loan is double the the 4% but you can only pay off 3k. If we instead compare how you much you would pay if you payed off $3005.66 you'd end up with paying $218.87 if you pay off the 4% loan or $248.93 if you put 3k towards the 3%. Essee also shows this, but you actually don't need to do the math since the simple rule of always paying off the higher interest loan is correct regardless of the principal.

    Just as a note, paying off a smaller balance with a lower interest rate never saves you money. Instead the reason people suggest this is because it's psychologically helpful and keeps people motivated to continue to pay off their debts.

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    HiroconHirocon Registered User regular
    As long as the interest rates are fixed, and as long as you pay enough on both loans to avoid additional fees, it's always better to pay off the loan with the higher interest rate first.

    Make the minimum required payments on both loans, then pay whatever's left of the $3000 on the 4.25% loan.

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    oldsakoldsak Registered User regular
    Nana wrote:
    I have it figured that

    4.25% of 3,005.66 is $127.74
    3.25% of 6,734.54 is $218.87

    So I am paying more interest on the 3.25% loan.
    I'm just not sure if I'm looking at this situation the wrong way.

    You need to think about it in terms of $3,000 not the entire amount of the loan. You're going to be reducing one loan by $3,000 so you basically have a choice as to whether you'd rather stop paying 4.25% interest on $3,000 or 3.25% on $3,000.

    If you apply it to the first loan then the interest you'll be paying will be:
    4.25% of $5.66 = $0.32
    3.25% of $6,734.54 = $218.87

    For a total of $219.19

    If you apply it to the second loan then the interest you'll be paying will be:
    4.25% of $3,005.66 = $127.74
    3.25% of $3,734.54 = $121.37

    for a total of $249.11

    So paying off the higher interest loan is clearly more to your benefit.

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