Repayment substitute via a fund

📖 The story

Instead of repaying directly, Mr. Vance wants to accumulate his loan amount of $200,000 over 15 years through a fund savings plan and then pay it off in one go. He assumes 8 % return.

ℹ Ordinary savings rate, no starting capital.

Change any number and press "Calculate" – or use "Type in" on the right to watch it entered.

What you learn

A repayment substitute via a fund only pays off if its return reliably beats the loan rate – otherwise the borrower carries the risk and ends up worse off.

In short: A repayment substitute via a savings plan only pays off if the expected fund return reliably beats the loan rate.

Formula

R = (FV − K0·q^n) / ((q^n − 1)/(q − 1))

With the example numbers

R = 200.000,00 € / ((qⁿ−1)/(q−1)), q = 1,006434, n = 180 = 592,41 €

How to read the formula

Here the final-value formula is solved for the rate: you divide the target by the compounding factor (qⁿ−1)/(q−1), which shows the multiple to which a rate of $1 grows. Takeaway: the longer n, the larger this factor – and the smaller the rate needed.

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