Here's a financial calculation problem for you

[danoodle]

I wanted to present a scenario that I am facing and would like to get some feedback on how I should go about this.

I have a bill that is in the amount of $6437.47. If I pay it off in the next couple weeks, I get a 30% discount and would have a bill of $4506.23.

The other option is a payment plan with monthly payments of $200 until the full balance of $6437.47 is paid. I might be able to negotiate them down a little further to $150, possibly lower. This is at 0% interest mind you.

Basically, is it worth paying it off all now, or at what monthly payment at 0% would make it worthwhile to forgo that route?

Come on math/accounting majors, let's see what you come up with!

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[evanwebb]

The simplest way to think of this is to treat the problem as if $4,506.23 is the amount owed (since technically it is). The difference of $1,931.24 is the total interest that you would pay over 32.19 months (to get annual % divide by 12). So your T = 2.69, Your P = 4,506.23, and your I = $1,931.24.

The formula is I=Prt, so 1,931.24 = 4,506.23*r*2.69.

When you solve it you get .16 or 16% interest.

I think you'd do better to pay it off now if you can.

 

[danoodle]

Thanks for responding! Looks like even if I negotiate them down to $100, i would be paying 8% interest. Doesn't seem worth it. Appreciate the equation and everything. It's been awhile since I've had to do something like that. Thanks again!

 

[MJ DeMarco]

I have a bill that is in the amount of $6437.47. If I pay it off in the next couple weeks, I get a 30% discount and would have a bill of $4506.23.

This is a 30% ROI. Can you get a 30% return from the stock market? Bonds? Bank CDs? Bank deposits? Mutual funds?

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[evanwebb]

This is a 30% ROI. Can you get a 30% return from the stock market? Bonds? Bank CDs? Bank deposits? Mutual funds?

Actually, that's probably the simplest way to think of it.

 

[AsherS]

If you have the cash to pay the bill in full while getting a 30% discount for doing so I can't think of a scenario where I wouldn't just pay it and be done with it. Per the other posts on here it certainly looks like mathematically it would make since to pay it now as well. Even aside from the math though, there would be a huge value to simply not having a $200 per month payment for the next 32 months. That would be close to 3 years of that same bill hanging around your neck! No thank you! Great posts on here by the way!

 

[danoodle]

I appreciate the input! I think it would be worth it if I could pay $50 a month or lower. That would be 4% interest if you calculate it like evenwebb showed. Keep in mind the time value of money, money is worth more now than in the future; it is not as simple as 30% ROI. Common sense says if the payment is $1 a month at 0% you would take that in a heartbeat, even if you owed 100,000 because in 50 years you would have only paid $600. There is a crossover point where it is not worth it to make the monthly payments. The question is what is that crossover point where it becomes worth it to pay the higher balance monthly. $10 a month would be worth it for sure. I think $20 would be as well. You can easily go deeper into this and calculate inflation and get quite complicated with this seemingly easy problem. Any further discussion is appreciated

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[evanwebb]

That's not how the equation works. If you are making smaller payments then in order to reach the final amount (the I) you would have to increase the time (the T). If you are paying $50/mo. then take 1,931.24/50/12 to get the new "T" in the equation and then recalculate. It will still be around
This assumes you are only negotiation the size of each payment with the same total payout.

 

[danoodle]

That's not how the equation works. If you are making smaller payments then in order to reach the final amount (the I) you would have to increase the time (the T). If you are paying $50/mo. then take 1,931.24/50/12 to get the new "T" in the equation and then recalculate. It will still be around
This assumes you are only negotiation the size of each payment with the same total payout.

You mean take the total amount, 6437.47/50/12 to get the new T right?

If I paid let's say $50 a month, that would increase it to 128.75 months so T = 10.73, P and I are the same at $4506.23 and $1931.24

so 1,931.24 = 4,506.23 x r x 10.73

Which equals 4%. Correct me if I'm wrong but I am trying to calculate this using your formula.

So to take it one step further, is it worth it to pay $50 for 129 months or pay $4506 now? How about $25 over 258 months or the $4506? At some point it becomes worth it to pay the higher amount monthly depending on what interest rate you are willing to pay. I know this is somewhat subjective since people are willing to pay different interest rates, but I'm saying what a reasonable person could say, this is worth paying monthly.

I'm just trying to stir the pot some and not just default into 30% ROI is "always" better mentality. Because it isn't that simple! You might be able to use this kind of tactic when negotiating a seller financed deal. A perfect example would be buying a house/property/something big and paying a higher sum for a lower rate which would be better for you in the long run.

A 30 year 100k mortgage at 6% is 600 per month payment. Total repayment is almost 216k over the 30 years.

Let's say you could negotiate a 30 year 150k at 2%, monthly payment would be $554 and total repayment is just under 200k. Just because it seems like a higher amount, the interest rate makes all the difference.

Come on guys, think outside the box and humor me here. Life is about negotiation. Use it to your advantage!

 

[WestCoast]

Wait, you've somehow worked out a scheme where you get a 30% discount if you pay in full.... and you're asking if you should pay in full?

Unless $6k is going to break you, for goodness sake take the 30%!

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[evanwebb]

You're right. My mistake. I responded in haste.

Two thoughts:

Personally I wouldn't want to deal with the $50/mo. payment for the next 10.73 years.

If you are this good at negotiating why don't you just negotiate away the payment completely!!! (okay, maybe not)

You mean take the total amount, 6437.47/50/12 to get the new T right?

If I paid let's say $50 a month, that would increase it to 128.75 months so T = 10.73, P and I are the same at $4506.23 and $1931.24

so 1,931.24 = 4,506.23 x r x 10.73

Which equals 4%. Correct me if I'm wrong but I am trying to calculate this using your formula.

So to take it one step further, is it worth it to pay $50 for 129 months or pay $4506 now? How about $25 over 258 months or the $4506? At some point it becomes worth it to pay the higher amount monthly depending on what interest rate you are willing to pay. I know this is somewhat subjective since people are willing to pay different interest rates, but I'm saying what a reasonable person could say, this is worth paying monthly.

I'm just trying to stir the pot some and not just default into 30% ROI is "always" better mentality. Because it isn't that simple! You might be able to use this kind of tactic when negotiating a seller financed deal. A perfect example would be buying a house/property/something big and paying a higher sum for a lower rate which would be better for you in the long run.

A 30 year 100k mortgage at 6% is 600 per month payment. Total repayment is almost 216k over the 30 years.

Let's say you could negotiate a 30 year 150k at 2%, monthly payment would be $554 and total repayment is just under 200k. Just because it seems like a higher amount, the interest rate makes all the difference.

Come on guys, think outside the box and humor me here. Life is about negotiation. Use it to your advantage!

 

[max momo]

What is you OPPORTUNITY Cost? Big element of that equation. Assuming you have 6k available, and ONLY 6k available (otherwise you wouldn't be worried about the debt, eh?) THEN you need to look at your other options for that 6k.

Could you buy a deal and flip it for 35%?

Sure, investing the 6k at 2% in a bond is ridiculous.

But, Could you buy a deal and flip it for 35%? Or 40% or 45%? There ARE deals out there (folks are hurting for cash).

Bottom line, what is the COST of settling the debt?

Not an easy computation of course, built on a track record more than anything...

 

[AsherS]

Yes, the opportunity cost and the TVM do come into play here. However, if say you kept the 6K debt, and then did a deal for 6K that you thought would return you 10K, but your deal fell through, now your stuck with 6k in debt and an item/deal that you can't move. I don't know if you should do one thing or the other. My point is that there is in fact risk involved with keeping the debt to do a deal that may or may not work. The only sure way to get a good deal here would be pay the thing off all at once with the discount. That's what I would do.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[healthstatus]

Also if you think the value of the dollar is going to crap out in the next few weeks/months/years then you want to delay payment and pay in the future with less valuable $$