Comparing 2 loans side-by-side will show you the best choice.
And the best way to do it is with colored charts and graphs, and an online calculator.
Loans have been the major consideration in every real estate investment that I have ever done. And comparing two loans was usually part of that process.
Today, we are looking at the most useful Calculator I have ever found for comparing two possible business loans or mortgages.
Here’s what the page looks like.
With this Calculator, you will be comparing 2 loans by looking at the:
- Monthly Payment
- Total Paid
- Total Paid Split: Interest & Principal
- Declining Balance Over Time
- Monthly Principal Payment Over Time
- Cumulative Principal Over Time
- Monthly Interest Over Time
- Cumulative Interest Over Time
- Amortization Table Loan 1
- Amortization Table Loan 2
And you can see the two loans charted side-by-side for a visual comparison.
Just for illustration, we will assume a loan of $50,000 for five years.
Loan 1 will be if we borrow from the bank at a rate of 4.5% like a normal business loan or mortgage.
Loan 2 will be if we borrow from a Private Lender at 11% if we are doing a short-term hold or a rehab and lease.
Enter 50000 for Loan Amount, and 5 for Term for both loans.
For Loan 1 enter 4.5 for Interest Rate.
For Loan 2 enter 11 for Interest Rate.
Ignore the ad with “Calculate Payment” in it, the numbers will change automatically.
The Loan 1 monthly payment will be $932.15 and Loan 2 will be $154.97 higher, at $1,087.12.
The Total Interest that you will pay with Loan 1 is $5,929.06 and the Total Interest paid with Loan 2 will be $15,227.27, and that is a lot more.
You can scroll down and see the other comparisons in colored charts.
One is the total amount that is to be paid back.
Total Paid for Loan 1 is $55,929.06.
Total Paid for Loan 2 is $65,227.27.
This is because of the much larger amount of interest being paid on Loan 2. If you are in a situation where you can take advantage of the deductibility of higher interest payments, the Loan 2 might be just as attractive for you as Loan 1.
The next chart, Balance Over Time, will show you that the Remaining Principal Balance over time for both Loan 1 and Loan 2 will be about the same, so there is no real advantage for choosing one over the other when you think that you might be paying off the loan early.
The next chart is Monthly Principal Payments Over Time. And in the beginning it will be higher for Loan 1 because less of your payment is for interest due to the lower interest rate, and more of the payment will be going to principal reduction. It gradually changes, and reverses just about the halfway point, and after that the Loan 2 payments contain more principal pay down. The Remaining Principal Balance is an important consideration for you if you are planning to refinance the loan at some point.
The next two charts, Monthly Interest Over Time and Cumulative Interest Over Time just show you that you will be paying less interest with Loan 1, which you already knew, but gives you a graphic illustration of just how much the difference will be.
The final two charts are actually Tables, and they are Amortization Schedules for each of the loans. They show the monthly payment amount, the interest portion, the principal portion, and the remaining balance for each of the 60 months.
The Calculator is very easy to use, and you can just replace any number in either of the loan input boxes and instantly get a new set of numbers, and a new chart.
This is the Calculator that I use when I am writing articles that include information about loans or mortgages. It covers all of the bases and saves me a lot of time.
Of course, in addition to comparing 2 loans, you might want to consider whether you should even be using loans, instead of concentrating on paying as much cash as possible on your investment properties. I have a Blog Post on this that explains your decision very well, called “Buy With Cash?,” which I recommend.
I touch on this same concept in more than one of my books, but the one with the most detailed information is “Do This, Not That!” and you can find it here on this website. Use the 3D Flip Reader to look at the Contents and read the first few chapters.
The paperback is available on my Amazon Author Page, along with my other books.
And I have related Articles about real estate investing and other real estate matters from other perspectives on my LinkedIn Page.
I am also active on Quora.com where I have answered over 300 questions, and they have almost 3 Million views.
If you happen to be doing, or if you are considering doing, a Section 1031 Like Kind Exchange, then you will really appreciate the value of what we are talking about, and I have a lot of material for you to consider on my S1031 Exchange website.
You should always check out the credentials of anyone, like myself, who you are relying on for accurate information by looking closely at their Biography. Here’s mine.
If you are interested in exploring my Catalog of Real Estate Investing books, but don’t know where to start, I suggest these three.
DISCLAIMER: I am an Attorney licensed to practice in Texas, North Carolina, Virginia, and the District of Columbia. But I am not your Attorney. I would be honored if I were, but I am not. Reading this Blog does not created an attorney-client relationship between us. Internet content should not be used as a substitute for the advice of a competent Attorney admitted or authorized to practice law in your state or jurisdiction.