Using Algorithms to Prepay Student Loans
At Payitoff, we love coming up with ways to beat the system and help you pay off your student loans more quickly.
We noticed that a lot of people have trouble figuring out how much extra money to put towards their student loans every month. Most people pick this number based what they think they can afford every month. Sometimes, folks just randomly guess.
We run nerdy simulations to figure it out!
How It Works
Putting an extra $1 towards your loans will lead to interest savings in the long run. Let’s look at an example:
Given a loan with a $10,000 balance, 6% interest and a monthly payment of $100, you’re charged $3,897.58 in interest over the life of the loan.
For the same loan at $101 per month, you’re charged at little less: $3,837.03 in interest. That’s a savings of $60.55 over the life of the loan. Not bad for an extra buck!
What if we add an extra $2? The interest charged is even less at $3,778.42. That’s a savings of $119.16 over the life of the loan.
Sounds great — more savings! That’s true. An extra $2 goes a long way.
However, the difference in savings between adding $0 and $1 is $60.55, but it drops to $58.61 when we compare the savings of $1 vs. $2.
That’s definitely good, but not as good as the original change in savings.
When we look at the relative savings, we get a much better picture of how each dollar of prepayment affects our outcome. As the extra payment increases, the relative strength of interest savings decreases.
Thnx, Math
Internally, we are simulating thousands and thousands of scenarios like this to find the point just before your interest savings flattens. With a little math and some creatively applied algorithms, we’re able to find the best possible approximation given your situation.
If you haven’t tried this out yet, sign up today and give it a whirl!
