The Ultimate Missing Loan Term
Even if you know the principal, interest rate, number of payments, and the monthly payment amount, there is one more loan term that is always "missing" from a lender's loan agreement.
What is the missing term?
It's called forgone potential future value.
What is Forgone Potential Future Value?
Forgone potential future value is what you will give up when you pay interest to a lending institution rather than invest that money into an investment that will earn interest.
Of course, the amount of potential future value you give up depends on the investment's interest rate and on how long you leave the investment to grow.
So before you sign the loan papers, be sure to solve for the ultimate missing loan term like this:
- Visit the Time Value of Money Calculator.
- Enter the total interest cost of the loan.
- Enter number of years between now and your life expectancy
- Let the calculator show you how much potential future value you will be giving up.
Finally, carefully weigh what you are getting in return for the interest charges (nothing!) versus the potential future value you are giving up.