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Old 10-17-2012, 06:50 PM
 
4 posts, read 19,667 times
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Question Paying off High Balance or High interest first

I have 2 student loans and the end of my grace period is fast approaching. One has a principal of $18,250 with an interest rate of 4.48% and a minimum payment of $189.02. The second loan has a balance of 4,400 with an interest rate of 6.8% and a minimum payment of $49.96. If I wanted to dedicate $450 per month towards these loans and pay them off ahead of schedule, what is the best mix?
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Old 10-17-2012, 06:53 PM
 
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Go to aq= bank site and look for loans then plug in the numbers to see which will save you the most over the time span of the loans.
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Old 10-17-2012, 06:54 PM
 
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By best I mean least interest paid once both are paid off.
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Old 10-17-2012, 07:01 PM
 
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Quote:
Originally Posted by c-bux View Post
I have 2 student loans and the end of my grace period is fast approaching. One has a principal of $18,250 with an interest rate of 4.48% and a minimum payment of $189.02. The second loan has a balance of 4,400 with an interest rate of 6.8% and a minimum payment of $49.96. If I wanted to dedicate $450 per month towards these loans and pay them off ahead of schedule, what is the best mix?
Pay off the highest interest rate first, min on the other. Even Dave Ramsey, who suggests paying off by balance, lowest balance first, would suggest that you pay off the $4,400 loan first because of the psychological impact of successfully paying off one of your loans.
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Old 10-17-2012, 07:11 PM
 
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Honestly, I just graduated, have good job, the psychological impact attribute doesn't effect me. What I am more interested in is if the lower interested applied to a significantly higher balance negates the need to pay of the higher interest rate applied to the lower balance. Or when the effect of time is factored in if the higher interest rate makes up for the lower balance.
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Old 10-17-2012, 07:49 PM
 
Location: Chicago
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Quote:
Originally Posted by c-bux View Post
Honestly, I just graduated, have good job, the psychological impact attribute doesn't effect me. What I am more interested in is if the lower interested applied to a significantly higher balance negates the need to pay of the higher interest rate applied to the lower balance. Or when the effect of time is factored in if the higher interest rate makes up for the lower balance.
Interest is a percentage, it has no baring on the balance of the loan. It doesn't matter if your balance is $1,000,000 or $10. If you are being charged a percentage of what you owe then it will be the same regardless. Get rid of the higher interest loans first and then work down to the lowest interest loans.
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Old 10-17-2012, 07:54 PM
 
Location: Upper East, NY
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Minimum $189 on the bigger loan because it is required. Rest of the $450 to the smaller one - less balance accruing future interest charges.
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Old 10-18-2012, 11:13 AM
 
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Originally Posted by ChiGuy2.5 View Post
Interest is a percentage, it has no baring on the balance of the loan. It doesn't matter if your balance is $1,000,000 or $10. If you are being charged a percentage of what you owe then it will be the same regardless. Get rid of the higher interest loans first and then work down to the lowest interest loans.
Exactly, even though a much higher balance will be costing you more each month in interest, the truth is you only have a finite amount to contribute to payments each month. So the balances are irrelevant.

So in that case where is each additional dollar best spent? Obviously on a higher interest loan. That way, the extra dollar you contribute to payments is taking away a dollar would garner higher interest.
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Old 10-18-2012, 11:28 AM
 
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always pay the higher interest first unless you're a mentally weak simpleton and need to pay off the lower balance first (in this case they are the same)
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Old 10-18-2012, 11:52 AM
 
Location: Your computer screen.
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I agree with the others. Look at it this way:

Suppose you have two loans:
  1. A $10,000 loan with an interest rate of 5%, and
  2. A $5000 loan with an interest rate of 10%
Both cost you $500, but in the first case you are able to carry twice as much debt for the same amount of payment. So it is a better deal to keep the first and pay off the second.
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