If I Loaned You $250,000?

[GTR]

If I loaned you $250,000 today and gave you two repayment options:

1. 60 monthly payments of $4,375.
2. 300 monthly payments of $800 followed by a single payment of $189,000.

Which would you choose?  Why?

[JTZ]

300 x 800 because after the first payment I would skip town

[12HRS]

300 x 800 because after the first payment I would skip town

why not skip town before the first payment...

[GTR]

Cause if you skip before the first payment, they're equal!

[mmgfarb]

Cause if you skip before the first payment, they're equal!

How do you figure?

[yitrap]

Looking to lend?

[12HRS]

Cause if you skip before the first payment, they're equal!

fair point

[mmgfarb]

How do you figure?

fair point

I'm am so stupid sometimes.

[mmgfarb]

0=0

Yea I figured it out, see the previous post

[coralsnake]

If I loaned you $250,000 today and gave you two repayment options:

1. 60 monthly payments of $4,375.
2. 300 monthly payments of $800 followed by a single payment of $189,000.

Which would you choose?  Why?

The question expects the reader to choose the seemingly lesser expensive first option since that is the lower total dollar amount of all payments.

But with 25 years to payback $189,000 and an annual $9600 "rent" on the loan this is in fact the much better option for a variety of reasons. Even the safest investments will guarantee payback with the rest to do whatever with.

[grodnoking]

Option two. Even on minimum interest I'll still make a profit.

[mmgfarb]

I think everyone would pick option 2 (JTZ excluded of course) what's the purpose of the question?

[good sam]

I think everyone would pick option 2 (JTZ excluded of course) what's the purpose of the question?

Everyone would choose option 2? Where would you get the $189,000 lump sum from?

I would choose option 1,

UNLESS, the loan is secured by real property or a performing business, in which case lower monthly payments increase my monthly cash flow and I can reasonably expect to refinance after 30 months.

[mmgfarb]

Everyone would choose option 2? Where would you get the $189,000 lump sum from?

I would choose option 1,

UNLESS, the loan is secured by real property or a performing business, in which case lower monthly payments increase my monthly cash flow and I can reasonably expect to refinance after 30 months.

Where would you get the $4,300?

[GTR]

Lotsa smart people on this very forum would choose option 1.  I am not one of them, give me option 2 all day.

Just checking my sanity here.  Thanks all.

[Aaaron]

Everyone would choose option 2? Where would you get the $189,000 lump sum from?

I would choose option 1,

UNLESS, the loan is secured by real property or a performing business, in which case lower monthly payments increase my monthly cash flow and I can reasonably expect to refinance after 30 months.

Toss $350/month into some safe investment that earns an avg of 4.5% over the next 25 years, and boom, you have the ~189k.

Or with $500/month you only need to average 2% year over year.

[Mountain Man]

If I loaned you $250,000 today and gave you two repayment options:

1. 60 monthly payments of $4,375.
2. 300 monthly payments of $800 followed by a single payment of $189,000.

Which would you choose?  Why?

I think it depends on what you're required ROR is.

Option 1 has an IRR of 1.95% and option 2 has an IRR of 3.24% but option 2 is 20 years longer and has a huge lump sum at the end of the payments which would make me concerned about the credit risk. If you got rid of the last $189,000 due 300 months from now you would actually have a negative IRR.

I'd be inclined to choose option 1.

[JTZ]

Toss $350/month into some safe investment that earns an avg of 4.5% over the next 25 years, and boom, you have the ~189k.

Describe "safe".

[Mountain Man]

Describe "safe".

Yeah, I think you'd be very hard pressed to find anything "safe" in an environment of negative yields and 30 year treasuries yielding 2.5%. But I'd love to learn something new.

[emjee]

Option two. Even on minimum interest I'll still make a profit.

+1