The Power of Power Payments: Accelerate Your Loan Repayment Journey
What should you do with the $500/month payment that you no longer have to pay on Loan A to reduce your loans as fast as possible?
Answer:
You should pay loan C since it does not only represent the largest monthly payment, but it also has the highest APR. The sooner you pay your credit card balance (loan C) the better.
On the other hand loan B has a smaller monthly payment and a much lower APR.
Final answer:
To utilise the Power Payments concept effectively, you should redirect the $500 monthly payment from the paid-off Loan A to the loan with the highest interest rate. In this case, that loan is Loan C with an 18% APR. This strategy reduces the overall interest paid and speeds up the payoff time.
Explanation:
The concept of Power Payments involves redirecting the cash freed up from a paid-off loan to accelerate the repayment of the remaining loans. When you finish paying off a loan, you redirect that monthly payment amount towards another loan to accelerate paying it off. In this case, since you've finished paying off Loan A, you should now apply the $500/month formerly going to Loan A towards the most expensive remaining loan. This means applying it to the loan with the highest interest rate.
Here, Loan B has an interest rate of 3% APR and Loan C has an interest rate of 18% APR. Therefore, the sensible choice under the Power Payments strategy is to redirect the $500/month from Loan A towards Loan C, which with its 18% APR, is the most expensive loan. This strategy will significantly speed up the payoff time and reduce the overall interest you'll pay