Canadian Personal Finance Blog

Archive for January 24th, 2008

If you are carrying debt with a bank, you were just given a gift (a huge gift if you live in the U.S.), because the banks have lowered their interest rates yet again on loans. What will you do? Will you simply lower your monthly payment to match what the banks ask you and use the extra money elsewhere, or will you exert financial intelligence on this debt and attempt to pay it off faster?

I propose a very pedagogical example for your reading pleasure.

Scenario 1: Original Debt

If you were say a Financial blogger and you had say, $13000 on your line of credit with your banking institution, your pay off schedule for that debt might look like this:

Great easy to understand and see, but wait, the bank just dropped my interest by 1/4 %!!!

New Debt Schedule with Lower Interest Rate

Well how would that look then if I was only paying 6.25%?

That’s kind of cool, I have saved $60 in interest over the length of the 3 year loan, that is nice.

The twist

The twist would be continuing to make the payment I would have made at 6.5%?

So what, I hear you say? Well I have saved about $5 in interest payments and my final principal payment is about $46 cheaper, so what? Um, that isn’t a good thing, you kept you spent $53.48  and you saved over $60 (or so) over 3 years, but you are paying ths debt down faster! If you had put that money in a bank account, would you have got that kind of payback?

Don’t just play with the cards dealt you, if you have budgeted to pay off a loan with a specific payment amount and interest rates drop, then keep up the original payment amount, you will speed up your Debt Pay down!