I'm currently the debtor of two loans:

  1. $620,000 CLP at 0.99% monthly interest, to be paid over 12 equal monthly instalments, starting this month.
  2. $180,000 CLP at 0% interest, but adjusted by inflation. It's payable on April 2025 and expected inflation is at 3.5%.

Thing is, loan #2 is a special government loan that mandates withholdings on 3% of my personal monthly revenue until this December, unless the loan is voluntarily fully paid before that month. All withholdings are inflation-adjusted so it doesn't devalue while they're withheld, but there's an opportunity cost on that money since it could be invested with returns higher than inflation.

Should I make an effort to pay loan #2 first and free my future income from unnecessary withholdings, or should I direct my payments to loan #1 since it's got interest while #2 does not (at least nominally).

  • You didn’t specify when #1 is due.
    – RonJohn
    Commented Apr 5 at 0:40
  • 2
    Also, #2 is effectively a 3.5% loan. Inflation, deductions, are distractions from the actual math.
    – RonJohn
    Commented Apr 5 at 0:42
  • @RonJohn I've edited my question so it's clear that loan #1 is paid through monthly instalments. Thanks! On #2, it's true that inflation is a distraction, but it's hard for me to intuitively know which loan to prefer since what's withheld is also inflation-adjusted.
    – ppp
    Commented Apr 5 at 0:45
  • You still didn’t say when #1 is due.
    – RonJohn
    Commented Apr 5 at 2:44
  • Okay, I'll try again
    – ppp
    Commented Apr 5 at 2:48

1 Answer 1

  1. Pay off whichever loan is charging you higher real interest. That will save you money.

  2. Or pay off whichever loan you can close out first. That may save you some emotional stress.

  3. Or any combination depending on how you weight these two factors.

Beyond that, it's all personal preference. Pick whichever will make you happiest.

  • 2
    Expected inflation may not do what's expected, of course. Make your best guess and don't look back.
    – keshlam
    Commented Apr 5 at 3:12
  • @keshlam since withholdings on my revenue are inflation-adjusted too and go towards payment of loan #2 when April 2025 comes, is real interest relevant in this case?
    – ppp
    Commented Apr 6 at 15:51
  • @RonJohn Are you sure? The lower balance (loan 2) follows inflation, which is projected at 3.5% annually -- lower than 0.99% monthly.
    – nanoman
    Commented Apr 7 at 14:51
  • @keshlam "don't look back" -- why not? If inflation spikes during the term of the loans, OP can and should reassess which one to prioritize.
    – nanoman
    Commented Apr 7 at 14:53
  • @nanoman: Granted. I guess I was mostly trying to say "don't stress about small differences."
    – keshlam
    Commented Apr 7 at 15:28

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