Have you ever faced the tough choice between saving money now or saving money later? That’s exactly the situation Aisha is in with her startup loan. She’s deciding between a 3-year loan with 8% interest or a 5-year loan with 6%. Let’s break down why the 3-year loan might actually be the smarter move if she wants the lowest overall interest costs.
Understanding Aisha’s Loan Options
Aisha needs a loan to finance her latest startup, and she has two fixed-rate offers:
-
3-year loan at 8% fixed interest
-
5-year loan at 6% fixed interest
At first glance, the 6% loan looks cheaper. But here’s the catch—interest adds up over time. The longer you hold a loan, the more interest you’ll pay overall, even if the rate is lower.
Why the 3-Year Loan Can Be Cheaper
Here’s where things get interesting. Even though the 3-year loan has a higher interest rate, Aisha will pay it off faster. That means fewer years of interest piling up.
-
A shorter loan term = less total interest.
-
Faster payoff = quicker debt freedom.
-
Higher monthly payments = smaller overall cost.
For example, imagine borrowing ₱100,000:
-
With a 3-year, 8% loan, she might pay about ₱12,700 in total interest.
-
With a 5-year, 6% loan, she could end up paying closer to ₱16,000 in interest.
That’s thousands saved simply by choosing the shorter option.
Interesting Facts About Loan Choices
-
Interest rates trick the eye: People often focus on the percentage, not the time factor.
-
Compounding time matters: Even a “smaller” rate adds up significantly over more years.
-
Lenders benefit from longer loans: More time means more profit for them.
-
Short-term loans build discipline: Higher monthly payments push borrowers to stay financially responsible.
When the 5-Year Loan Could Still Make Sense
Of course, the 5-year loan isn’t always the wrong choice. It depends on cash flow and risk tolerance.
-
Lower monthly payments make it easier to manage business ups and downs.
-
More breathing room for unexpected expenses.
-
Less financial pressure in the early stages of a startup.
But if Aisha’s main goal is the lowest overall interest cost, the 3-year loan wins hands down.
My Personal Take
If I were in Aisha’s shoes, I’d go for the 3-year loan. Yes, it means tighter monthly payments, but knowing I’d save money in the long run would be worth it. I’d rather feel the pinch now than carry extra costs for two more years.
Wrapping It Up
So, why would Aisha pick the 3-year loan? Because even though it has a higher interest rate, she’ll pay less in total interest and get out of debt faster. The 5-year loan looks easier month-to-month, but the extra years add up to more cost.
What about you—would you choose lower payments now or bigger savings later?