[Dave-ROR]

Originally Posted by Jordanwolf

This is incorrect information as to how interest is calculated, it's not quite as simple as that. It's more like a month to month percentage on what is remaining annually. I can't remember the exact calculations, I just know it's not super simple.

Go to a car website, Subaru for example and attempt to replicate the way the calculate interest on a vehicle. It works something like the first few months of payment, the amount of interest that is being paid is visibly lower, but then as the months go on, the payments to the actual car get smaller and the payments to interest begin to grow. It's kind of why you can save money by putting lump sums down on a car, at least, this is how I understand it, I could be wrong though, someone much more intelligent should correct me :P

While true, his example is still an accurate portrayal of the concept.

Min $ comes into play clearly to determine a more detailed result as principal balance is required to calculate each month. IE, that 3% loan could be a $350/month car payment - or it could be a fresh 3 year loan (ok no one would do that I hope, but still).

However, it still doesn't matter.

For easy numbers, if it's the tail end of a 5 year car loan for $20k at 3%, that remaining $1,073 of principal costs him $3 of interest. If it's the fresh 3y $1k loan scenario, the interest over that lifetime of the loan is a whole $47.

There is simply no way that paying that off will ever beat that higher interest loan. Period.

Now, there's a gratification factor in paying off a loan. I get it, and have done so before even knowing it was the worse financial option.