Which loan to add extra payment to

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
Ithrive
Posts: 28
Joined: Sun Apr 02, 2017 8:05 pm

Which loan to add extra payment to

Post by Ithrive »

Please help me decide the most logical placement of $100k.

There are three loans. One is $800K at 5.1% and matures in 2028 just making the standard P&I payments. The other two are both for $290K each at 4.8% interest and also mature in 2028 as is. I have $100k extra.

The question is: Should I place it on the $800k loan, in which case it'd drop the time by about a year and save 35k interest or on one of the $290k loans, thereby decreasing the time by 2.5 years and saving $30k in interest?

Though it'd make sense to save an extra $5K interest (money being fungible and all), I don't know if the earlier payoff, in real-world experience, is more significant. I suspect that this scenario is not novel and I assume that if there is some financial or psychological principle that comes into play, the bogleheads would be well versed and able to enlighten me. I also assume that it is better to make the payment to one loan versus spreading it around.

Hope you all had a happy Thanksgiving and thanks for your time.
mary1492
Posts: 716
Joined: Thu Oct 17, 2019 3:02 am

Re: Which loan to add extra payment to

Post by mary1492 »

xyzzy
Last edited by mary1492 on Tue Oct 04, 2022 3:13 am, edited 2 times in total.
User avatar
Nate79
Posts: 9373
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Which loan to add extra payment to

Post by Nate79 »

The interest rate is the cost of the loan. I would put the money towards the highest interest rate.
User avatar
JoeRetire
Posts: 15381
Joined: Tue Jan 16, 2018 1:44 pm

Re: Which loan to add extra payment to

Post by JoeRetire »

Ithrive wrote: Sat Nov 27, 2021 3:49 pm Though it'd make sense to save an extra $5K interest (money being fungible and all), I don't know if the earlier payoff, in real-world experience, is more significant.
That depends what "significant" means to you.

Some folks feel it is more significant to get a satisfying sense of accomplishment by completely paying off one loan, even if the rate is lower.
Other folks feel it is more significant to save the most in interest payments.
Still others feel it is more significant to keep their money in the market, thereby earning more than cost of the interest paid.

Once you decide your personal definition of "significant" the path forward should be clear.
This isn't just my wallet. It's an organizer, a memory and an old friend.
Topic Author
Ithrive
Posts: 28
Joined: Sun Apr 02, 2017 8:05 pm

Re: Which loan to add extra payment to

Post by Ithrive »

That depends what "significant" means to you.

Some folks feel it is more significant to get a satisfying sense of accomplishment by completely paying off one loan, even if the rate is lower.
Other folks feel it is more significant to save the most in interest payments.
Still others feel it is more significant to keep their money in the market, thereby earning more than cost of the interest paid.

Once you decide your personal definition of "significant" the path forward should be clear.
At any given moment, I can convince myself that either of these options yields the best outcome. Hence my question as to whether there is some settled principle that one would use when making a decision such as this. (Though my consideration of the first option you list is to sooner have funds that are not obligated to pay off a loan).
User avatar
JoeRetire
Posts: 15381
Joined: Tue Jan 16, 2018 1:44 pm

Re: Which loan to add extra payment to

Post by JoeRetire »

Ithrive wrote: Sat Nov 27, 2021 4:11 pmHence my question as to whether there is some settled principle that one would use when making a decision such as this.
No settled principle, other than to figure out what brings you the most long-term job and maximize that.
Though my consideration of the first option you list is to sooner have funds that are not obligated to pay off a loan
Does that mean if you paid off one of the smaller loans you would not continue and pay off the bigger loans? Otherwise, until all the loans are paid off, you won't have funds that are not obligated to pay off a loan right?

Perhaps I don't understand your consideration.
This isn't just my wallet. It's an organizer, a memory and an old friend.
Jack FFR1846
Posts: 18501
Joined: Tue Dec 31, 2013 6:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: Which loan to add extra payment to

Post by Jack FFR1846 »

I tend to be overly logical, like Mr. Spoc on Star Trek.

I ask one question: "Do you want to save more money with this extra payment or do you want to save a smaller amount of money with this payment?".
Bogle: Smart Beta is stupid
User avatar
Wiggums
Posts: 7051
Joined: Thu Jan 31, 2019 7:02 am

Re: Which loan to add extra payment to

Post by Wiggums »

I would put the money towards the highest interest rate. The Interest-rates are so close, that you can’t go wrong with any of the loans.
"I started with nothing and I still have most of it left."
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: Which loan to add extra payment to

Post by KlangFool »

Ithrive wrote: Sat Nov 27, 2021 3:49 pm
There are three loans. One is $800K at 5.1% and matures in 2028 just making the standard P&I payments. The other two are both for $290K each at 4.8% interest and also mature in 2028 as is. I have $100k extra.
Ithrive,

Why would you pay down any of those loans if they are "cash flow positive" and making you money?

Are all those 3 loans for your own residential houses? Or, are they commercial properties that you rented out?

Why pay down commercial loans that are making you money?

In the grand scheme of things, pay down 100K over 800K + 290K + 290K = 1.38 million of loan is insignificant. But, losing the liquidity of 100K is significant when things go bad.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
GAAP
Posts: 2556
Joined: Fri Apr 08, 2016 12:41 pm

Re: Which loan to add extra payment to

Post by GAAP »

I think your "settled principle" would be something like:

If you're most concerned about the cost of debt, payoff the highest rate first. If you're most concerned about the number of debts, payoff the smallest total first.

Essentially, it's a choice between mathematics and emotions.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee
smitcat
Posts: 13302
Joined: Mon Nov 07, 2016 9:51 am

Re: Which loan to add extra payment to

Post by smitcat »

Ithrive wrote: Sat Nov 27, 2021 4:11 pm
That depends what "significant" means to you.

Some folks feel it is more significant to get a satisfying sense of accomplishment by completely paying off one loan, even if the rate is lower.
Other folks feel it is more significant to save the most in interest payments.
Still others feel it is more significant to keep their money in the market, thereby earning more than cost of the interest paid.

Once you decide your personal definition of "significant" the path forward should be clear.
At any given moment, I can convince myself that either of these options yields the best outcome. Hence my question as to whether there is some settled principle that one would use when making a decision such as this. (Though my consideration of the first option you list is to sooner have funds that are not obligated to pay off a loan).
If there is no legal advantage to any of these loans then always pay the highest rate back first.
If they do not present equivalent liabilities for you then we would need more details.
Topic Author
Ithrive
Posts: 28
Joined: Sun Apr 02, 2017 8:05 pm

Re: Which loan to add extra payment to

Post by Ithrive »

.I think your "settled principle" would be something like:

If you're most concerned about the cost of debt, payoff the highest rate first. If you're most concerned about the number of debts, payoff the smallest total first.

Essentially, it's a choice between mathematics and emotions.
I think that's it.

Though klangfool brings up a good point: Invest and let the markets provide more return than the interest will cost over the same time period.
babystep
Posts: 775
Joined: Tue Apr 09, 2019 9:44 am

Re: Which loan to add extra payment to

Post by babystep »

Why interest rate is so high? Commercial? Both interest tax deductible?
I assume liquidity is not an issue then I would pay towards the higher interest rate.
User avatar
PeaksAndValleys
Posts: 42
Joined: Sun Feb 28, 2021 1:31 pm

Re: Which loan to add extra payment to

Post by PeaksAndValleys »

I, like most others, would just throw it against that loan with the highest interest rate.

Alternatively, paying them off one by one starting at the smallest provides an emotional win and may help with cashflow if you are having cashflow problems.
momvesting
Posts: 514
Joined: Tue Apr 12, 2016 9:18 pm

Re: Which loan to add extra payment to

Post by momvesting »

Will any of the loans do a recast if you make a large payment? Will any become eligible for a lower rate refi? I'd look at those questions before deciding.
User avatar
JoeRetire
Posts: 15381
Joined: Tue Jan 16, 2018 1:44 pm

Re: Which loan to add extra payment to

Post by JoeRetire »

PeaksAndValleys wrote: Sun Nov 28, 2021 1:01 am Alternatively, paying them off one by one starting at the smallest provides an emotional win and may help with cashflow if you are having cashflow problems.
How does that help with cashflow problems?
This isn't just my wallet. It's an organizer, a memory and an old friend.
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Which loan to add extra payment to

Post by grabiner »

JoeRetire wrote: Sun Nov 28, 2021 6:49 am
PeaksAndValleys wrote: Sun Nov 28, 2021 1:01 am Alternatively, paying them off one by one starting at the smallest provides an emotional win and may help with cashflow if you are having cashflow problems.
How does that help with cashflow problems?
When you have paid off a loan, you no longer have payments due on that loan, which improves your cashflow. When you only pay down a loan, your cashflow does not improve because the same payment is still due each month; you can improve cashflow only if you recast or refinance,
Wiki David Grabiner
Post Reply