Is it more profitable to repay a loan in its entirety asap as to avoid interests ?
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Depends on the interest rate.
For low interest loans a lot of economists will actually recommend to pay them back as slowly as possible – your money can earn more interest elsewhere than you’re paying on the loan.
For higher rate loans like credit cards, absolutely pay them off as quickly as possible.
Yes. Interest payments are extra money being charged for the convenience of paying later and not having the full amount of money up front
I mean, yes. However, if you can repay the entire loan then…why did you take out a loan in the first place?
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It heavily depends on the terms of the loan. Some loans have prepayment penalties that may mean paying all or most of the interest if repayment is made early, in those cases it’s definitely not better.
Without penalties, it depends on what you would do with the money if you didn’t repay the loan. If you used the money to make more money than the cost of the interest on the repaid portion, then it’s not, but if it’s less then yes, it would be more profitable.
I heard somewhere that doubling your monthly payments will cut the payment period for more than half. So, If you go on a home loan, and, after a couple of years, you get paid better, would it be better to increase the monthly payments ?
Put most simply, it depends on how much money you think you can make.
Let’s just ignore compounding to keep things simple and assume if you pay back your loan today you have to pay $1,000, if you pay it back next year, you have to pay back $1,100, and there are no other options for repayment.
Now let’s say you have a business opportunity. If you invest $1,000 it seems very likely you’ll make $2,000 in revenue. If you, instead, spend $1,000 on the loan, you have “saved” yourself from spending $100 in the future but you have also “lost” $1,000 in profits from the revenue you couldn’t generate. So in this circumstance, it would be “smarter” to make the business investment. You spend $1,000, make $2,000, pay back $1,100, and keep $900. That’s better than having $0.
I said “smarter” because often business opportunities are not a guarantee, unless you’re a banker or investing with millions of dollars. Those people can negotiate deals where even if the investment fails, the companies they invested them have to pay them a bonus for being so smart or, in some cases, the government makes YOU pay them back to reward them for their genius. Normal people who invest in things that fail lose money.
So think about it like a meter. Every day you have the loan the interest “costs” you a little bit. But every day you’re making an investment you’re getting paid a little bit. If you get paid more than the interest, it’s better to make the investment.
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