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Retirement of Loans

Which is preferable, a loan with a lower present value or a loan with a lower periodic installment? Why?

What would be preferable, to retire a loan towards the end of its term or much before it? Explain your answer.

If a loan has a pre-payment penalty attached to it, would it still be viable to retire it? Why or why not?

Is it better to retire all loans much before their term? Explain your answer.

How much importance should be given to the fact that while the gains from the retirement of a loan can be estimated with certainty, the returns from an investment always carry a risk attached to them?

Solution Preview

Which is preferable, a loan with a lower present value or a loan with a lower periodic installment? Why?
The present value of a future cash flow is the nominal amount of money to change hands at some future date, discounted to account for the time value of money. A given amount of money is always more valuable sooner than later since this enables one to take advantage of investment opportunities.
A loan with lower present value is preferable than the lower periodic installment. The reason behind this is that if present value is lower one has to pay less. The lower periodic installments mean number of installments are less but the quantum of installment will be higher as its present value is higher. Thus the borrower have to pay more in the latter case.

What would be preferable, to retire a loan towards the end of its term or much before it? Explain your answer.
To retire a loan earlier is preferable because one has to pay less interest it will save you tens of thousands of dollars. The second reason is the peace of mind you gain. . Thus his costs will go down and profits will increase.

If a loan has a pre-payment penalty attached to it, would it still be ...

Solution Summary

This discusses the retirement of loans under various situations

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