How much do you have to pay if you pay off a loan today? The total
amount owed on it as of today + any charges the lending institution
will levy for early payment + any termination charges you might have
agreed to + the interest for the few days you'll need to get your
payment processed. The only sure way to know the amount is to check
with the lender.
How much will you save? That depends on your definition of "save." A
common method, IMO very misleading, goes something like this:
You owe a $100,000 for a loan at 10% interest and you are making
monthly payments with the idea of paying back in 10 years. That means
you need to pay $1,321.51 each month. Your total payments over the 10
years will be $158,580.88. If you pay off the loan today, you need to
pay $100,000. So, you save $58,580.88
See the problem with that logic?
The way I would look at it is this. If you have the $100,000 in hand,
what can you do with it? Can you invest it at a rate > 10%? If so,
won't you 'save' by investing the money in this opportunity, using that
income (which will be greater than $1,321.51 each month) to make the
monthly loan payment and use what's left for something else? On the
other hand, if your investment will yield less than 10%...
Finally, don't treat my comments as sacrosanct. My analysis ignored
your specific level of risk tolerance, volatility in the return on your
investment, liquidity issues, and taxes. Consult with a professional
familiar with you, your preferences and applicable tax laws.
--
Regards,
Tushar Mehta, MS MVP -- Excel
www.tushar-mehta.com
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