Why You Should Pay High Interest Loan First

Why You Should Pay High Interest Loan First



Why you​ Should Pay High Interest Loan First
Paying your loan is​ like renting equipments .​
You see,​ interest rate is​ like the​ rent cost of​ money .​
It’s like you​ are employing someone else’s money and you​ have to​ pay that money salary .​
In money,​ the​ money’s salary is​ often stated in​ terms of​ the​ ratio between money borrowed and how much you​ have to​ pay for borrowing such money .​
That ratio is​ called interest rate .​
For example,​ if​ you​ borrow $10,​000 and you​ have to​ pay $3,​000 per year for not paying that $10,​000 then your interest rate is​ $2,​000/$10,​000=30% .​
Simple?
That’s assuming that the​ money you​ borrow is​ constant,​ namely $10,​000 .​
If you​ don’t pay your interests,​ then the​ $3,​000 is​ added to​ your loan .​
So next year,​ you​ owe $13,​000 .​
Two years from now,​ you’ll owe $16,​900 .​
Got it? in​ Math,​ few functions increase faster than exponential function,​ and this is​ one of​ it .​
If you​ borrow some money at​ 30% interest rate from a​ credit card company and 9.9% interest rate from your mortgage,​ then you​ are paying more money for your credit card company for every unpaid dollar loan.
Each dollar from a​ credit card company costs 30 cents per year,​ while each dollar from your mortgage costs 9.9 cents per year .​
Think of​ it​ this way .​
Say each dollar that you​ owe is​ like your employees .​
Just like your boss paying you​ your salary for borrowing your time,​ you​ pay your creditor for borrowing their money .​
You should of​ course,​ try to​ fire the​ higher paid employee first .​
Why hire money from the​ credit card company for 30 cents per year if​ you​ can hire money from your mortgage company for 9.9 cents per year .​
For simplicity's sake,​ say each dollar from a​ credit card company is​ worth the​ same with each dollar from your mortgage,​ obviously you​ want to​ pay less salary to​ the​ credit card company .​
So you​ should pay your credit card company first .​
If you​ owe $30,​000 from a​ credit card company and $30,​000 from your mortgage,​ for the​ same payment,​ you’ll be free of​ debt cheaper if​ you​ pay your credit card company first .​
I made a​ simulation and put the​ result in​ a​ very easy to​ understand table in​ fasterfinancialfreedom.com .​
Then,​ I​ translated the​ whole thing into English for even more sense.




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