Is it more profitable to repay a loan in its entirety asap as to avoid interests ?
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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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