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> One of my favorite tabs is taking a high interest loan or credit card and increasing the payment amounts (even a little) to reduce the overall impact of the i

> One of my favorite tabs is taking a high interest loan or credit card and increasing the payment amounts (even a little) to reduce the overall impact of the interest rate, something a lot of people don’t understand. Looks like I belong to those people that don't understand: What "payment amounts" are you increasing?

jayd16 2y ago
Presumably they're talking about paying down more of the principle sooner, lowering the interest amounts.
- ChicagoDave 2y ago
  Take any loan/credit and stretch it out until it’s paid off under the current parameters. You can calculate total interest paid. Now add an extra column to pay extra (against the principal). Now calculate total interest paid. Save this separately. Now the fun part. Go back to the original and adjust the interest rate until the total interest paid is the same as the adjusted version. You just found a way to reduce your interest “rate”.
  - abenga 2y ago
    There is the "debt is bad" viewpoint, where paying your loan earlier is seen as a good thing, which is a valid way to look at it, depending on your values. However, what you described can also be done this way: invest the extra payment amount elsewhere and get interest/capital gains on it, which gives you the lower effective interest rate and the extra liquidity as well. Or in other words, the figures on the spreadsheet need to reflect the opportunity cost of the extra payment, or the lower total interest paid is a misleading mirage.
    - ChicagoDave 2y ago
      There are definitely levels of sophistication in managing interest liabilities. If you have a mortgage at 3%, paying the principal early is wasting your extra monty. As you said, you can invest the extra and make 7% (hypothetical) and clearly that’s advantageous. My example is for people struggling with credit cards and high interest loans that don’t have investment properties.

jayd16 2y ago

Presumably they're talking about paying down more of the principle sooner, lowering the interest amounts.

ChicagoDave 2y ago
Take any loan/credit and stretch it out until it’s paid off under the current parameters. You can calculate total interest paid. Now add an extra column to pay extra (against the principal). Now calculate total interest paid. Save this separately. Now the fun part. Go back to the original and adjust the interest rate until the total interest paid is the same as the adjusted version. You just found a way to reduce your interest “rate”.
- abenga 2y ago
  There is the "debt is bad" viewpoint, where paying your loan earlier is seen as a good thing, which is a valid way to look at it, depending on your values. However, what you described can also be done this way: invest the extra payment amount elsewhere and get interest/capital gains on it, which gives you the lower effective interest rate and the extra liquidity as well. Or in other words, the figures on the spreadsheet need to reflect the opportunity cost of the extra payment, or the lower total interest paid is a misleading mirage.
  - ChicagoDave 2y ago
    There are definitely levels of sophistication in managing interest liabilities. If you have a mortgage at 3%, paying the principal early is wasting your extra monty. As you said, you can invest the extra and make 7% (hypothetical) and clearly that’s advantageous. My example is for people struggling with credit cards and high interest loans that don’t have investment properties.