Question

For a loan of $100,000 at a rate of 6% for fifteen years, the payment is about $843 a month. For the same loan amount, at an interest rate of 7.5%, you must increase the life of the loan to keep the same payment. The term must extend over 18 years instead of 15 years. With these thoughts in mind, how would paying off a loan early affect the amount of interest paid for the loan?

Answer 1

Condition 1:

Loan amount is = $100000

Rate of interest = 6%

Time period is = 15 years

Monthly payment amount = $843

Condition 2:

Loan amount = $100000

Rate of interest = 7.5%

Time period is = 18 years

Monthly payment =  Lets suppose this is the same $843.

Lets suppose no reducing method is applied on both conditions.

So in 15 years the amount to be paid will be = 180*843 = $151740

In 18 years the amount becomes = 216*843 = $182088

So the interest amount paid in the second condition is higher than the amount paid in first condition.

Hence, paying off a loan early will result in paying less interest amount paid for the loan.