I hear it every day"Can we pay off early?"
Fire departments choose a longer term (more years) for the lower payment and plan to pay it off early. The goal is to save money.
Why this never gets you what you wantThere are 2 reasons why this strategy never works as planned.
- Nobody pays off early. Even though almost 100% ask, less than 2% of fire departments actually pay off early. They just pay the lower payment for a longer time and pay a lot more interest.
- It misses how interest is calculated. For everyone who does pays off, they pay off with only a few years left. The problem is that most of the interest has already been paid. This strategy forgets that the most savings occur when you pay at the beginning, not the end. Here's a chart to show the difference:
|Comparison of financing terms and interest paid|
SummaryThe strategy of financing long and paying off early as a money saving move is a myth. Don't fall for it.
Next week, we'll show you how to avoid this myth.
John R. Hill