Loan Payoff Strategy #2

When it comes to paying off loans typically there are 2 typical ways to work through the problem, which we can look at some alternate strategies, there is even a 3rd unorthodox way to paying off faster potentially. Today we will look at strategy #2 and in future posts we will discuss the remaining strategies.

2. Pay less interest over the life of the loan.

Strategy #2
To accomplish strategy #2 you find a way to pay less interest. Well suppose like me you have a 7% interest loan, how do we reduce the interest rate? Well I also happen to have a poor loan to value ratio on my house, so refinancing adding in PMI may not save me a whole lot, so I need to find an unorthodox way to reduce the interest rate.

Credit Card Arbitrage
First up, depending on your credit worthiness, you might be able to take a credit card, that has a 0% interest rate and 0% balance transfer fee for 18 months and pay on that until the 18 months are up. At about month 16 you start looking and applying for another 18 month 0% interest credit card with 0% balance transfer fee, and transfer again. Paying for a 100k house in 18 months would require $5555 a month payments (approx), or for 36 months at $2777. Make it three 18 month periods and you're only paying out of pocket $1851 a month, while this is higher than a standard mortgage for a 100K house, you end up with a house you own outright paying less than $1900 a month for 4.5 years. You've also managed to buy that house INTEREST FREE. Meaning that if you decide to move or sell the house, it's pure profit, and it's not the we'll tax you until you have no more money, profit, my understanding is that the profit above what you bought the house for is taxed higher, but anything below either isn't taxed or is taxed at a normal rate, so you are barely touched.

Car Loan
This strategy I have not tried, so I don't even know if it would work, however the idea is interesting and I am tempted to see if I can make it work. I'll lay out the approach here. I am a married individual. Suppose I have a car worth 18K. I decide to sell that car to my wife and who takes a 1.75% loan on the 18K. Next, my wife has a car worth say another 18K and I take out a loan for 1.75%. Now we have nearly 36K in loans for 1.75% while this doesn't necessarily pay off the entire loan it does amount to a much lower overall interest rate when taking a 100K loan at 4.5% interest originally. The original loan would likely cost you $506 a month out of pocket, and another $627 over the 5 years on the 1.75% interest rate loan.

If we compare say just paying 627 extra a month on the loan.

The original loan would be at 90K approximately at 5 years if you just payed the minimum. If you payed the extra 627 a month you would end up with a balance of 48K on the loan, Instead, if you take the 36K loan for 5 years your original loan would be 45K after 5 years and you would pay 1624 in interest.

Rough numbers show that even though it's another loan you'd still save another 1.5K by the car loan strategy.

Whats more exciting about this strategy is that had you just paid the loan at the normal rate you would have paid 82K in interest. By paying the extra 627 a month for the life of the loan you reduce that number to 21K. Nearly reducing by 1/4. PLUS your loan is paid off after 9 years.

Taking the 36 month loan, and then paying the minimum, you'll end up paying 23K in interest. This means that you only pay 627 for 5 years and then just pay 509 a month for another 9 years.

So suppose you only want to pay extra for a little while then go to a normal monthly payment taking a car loan might make sense, but in reality for 4 more years of the extra 627 a month may make sense. Combining the two strategies might make even more sense. Suppose you take the car loan for the first 5 years reduce your loan to 45K, then pay 627 a month after. I am absolutely sure that you would save even more as the additional 627 a month on the lower principal would result in less overall interest. The calculators online don't give me that option, but I'll see if I can come up with a calculation in the near future.