The Mathematics of Money

188 Chapter 4 Annuities

With her old loans, her remaining payments would total:

Loan Payment

Remaining

Payments

Total

Remaining

Car $288.95 37 $10,691

Student $353.08 108 $38,133

Mortgage $1,104.29 228 $251,778

To tal $300,602

Surprisingly, we see that she will actually not save anything by consolidating. The total she

would pay with the new loan is over $150,000 more than what she would pay on her existing

loans!

How can this be? We just saw a moment ago that consolidating and refinancing would save

Andrea nearly $500 a month. How can it be that she would end up paying so much more?

The reason lies in the number of months. By consolidating, she did lower her monthly

payment, but she took debts that would be paid off in 19 years, 9 years, and just over

3 years and converted them into a debt that will take 30 years to pay off. Stretching this out,

in fact, was the main reason why the new consolidated loan payment is so much lower.

Does this mean that consolidating and/or refinancing is a bad idea? Absolutely not.

Andrea may decide that freeing up $500 cash in her monthly budget is well worth extend-

ing her final payoff farther into the future. Money may be tight now, and she may figure

that things hopefully will not be so tight far in the future when those extra payments will

be made. The decision of whether or not this sort of deal is a good one is complex, and it

requires weighing the competing desires to get out of debt and to keep her payments down.

There may be other factors to consider as well.^4

There is no simple answer to whether or not consolidation is a good idea. At least in

this example, there are both pros and cons to consolidating. What can be said in general,

though, is that it is always worthwhile to make sure that you know what the deal is, and

crunch the numbers to make sure you understand just exactly what you will be paying.

Andrea may decide the greater overall payment is worth the lower monthly payment, but

she should make that decision with her eyes open, understanding that the lower monthly

payment comes at a price.

(^4) For example: Mortgage interest is usually tax deductible, even for a refi nanced loan, while interest for car loans is
not and interest for student loans may or may not be. The new loan’s interest rate may be much better, or much
worse, than the rates on the old loans. And so on and so forth.
EXERCISES 4.5
A. Amortization Tables

1. Fill in the missing portions of the amortization table. The loan’s initial balance was $23,450, payments are monthly, and
   the interest rate is 9%. (Note that these are only the fi rst six rows of a much longer table; the balance will not reach zero
   in row 6.)

Payment

Number

Payment

Amount

Interest

Amount

Principal

Amount

Remaining

Balance

1 $250.00

2 $250.00

3 $250.00

4 $250.00

5 $250.00

6 $250.00