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What's the return on paying off debt?

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  • What's the return on paying off debt?

    I have a weird question. Maybe I'm thinking about it wrong. It seems to me that the return on paying off debt can be different (better) than the actual interest rate.

    For example: I have a private loan on a real estate deal. The interest rate is 6.5%. The payment is $184.67/month and the payoff amount is $26,975.73.

    If I paid that loan off, then my monthly cash flow would increase by the payment amount. My assumption was that I would be getting a 6.5% return - the interest rate on the loan.

    However, when I run the numbers, it actually looks like my return would be better. $184.67*12/$26,975.73 = 8.2%.

    What am I missing here?

  • #2
    Use your original loan amount, which would be in the $34k range using the equation you're using. Using it how you're using it is incorrect. Use the equation you're using except act like you're down to your last loan. The rate you get will be astronomical.
    Last edited by CordMcNally; 07-10-2021, 09:23 AM.


    • #3
      What you're missing is you're not gaining anything. If you can pay that off then you already have the money. You're not gaining anything.

      The only part you can save is whatever total interest is left vs. whatever else you could do with the money. You cant "save" by paying back principal, you owe that no matter what.

      The only savings are what you owe in interest if paid off over the agreed time period vs. paying it off today. Which is simple and a whole lot smaller. You should compare it to say putting that money in the market, thats the opportunity cost of paying off the loan.


      • #4
        Your $184.67/month is part interest payment and part repayment of principal. Only the interest component of the monthly payment matters for the calculation of return.

        There is also the issue of paying the interest in post-tax dollars, if you are trying to compare payoff scenarios.


        • #5
          What if you looked at it differently? How about the interest rate x loan amount x number of years = total cost of the loan (you know what I mean). The total cost of the loan instead…. That’s the actual return on paying it off. I was never a “monthly payments” type of guy with debt. It makes large amounts look small.