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Snowflaking your Prosper Loan to Save Interest

by idfnl on 08/4/08

SnowflakingSnowflaking is a way to save on interest. The general principle is to pay in a small extra amount towards a loan every month, a $5 snowflake here, a $10 snowflake there starts to build into a snowball which, if rolled downhill, compounds. These small amounts might not seem like much, but they definitely add up.

This process is traditionally used for reducing credit card payments but it’s also viable for a Prosper loan since any snowflake you put in will reduce the overall interest you’ve spent for the entire term of the loan. You will also end up paying it off early.

You will see below that that snowflaking is more valuable the higher your interest rate goes.

For example:
Let’s look at a very simple example of how this process can save you money. Let’s say you got the minimum amount possible for a Prosper loan, $1,000 and let’s say it was at 9%. Let’s snowflake at a 1% rate, meaning that you put in an extra $10 (which is 1% of the loan amount) a month towards the principal, and see what happens:

  • Your 36 month loan term has been shortened to 27 months
  • Your total interest paid has been reduced from $144 to $106, a savings of $38 which adds up to a savings of 27% on interest
  • That’s 3.8% of the $1,000 principal

It may not seem like a huge amount, but if you pay a higher rate see below, it gets better.

Scaling it out
Now, a $1,000 loan is not a lot of money, and $10 is not a lot extra to pay in, but if you scale the 1% rule up you save a lot more money. If you borrowed $10,000 and snowflaked at a 1% rate ($100 extra a month) you’d save almost $400 in interest payments! Scale it up to the maximum loan amount for a Prosper loan of $25,000 and, at 9%, you’d save $1,000 in interest – nothing to sneeze at.

Scaling it up
I mentioned it gets better. We looked at how much you can save on a Prosper loan by looking across different loan amounts. What happens if we look vertically at different interest rates as they go up, how much more will you save?

Turns out a lot. Let’s start with that $1,000, and let’s say that interest rate is 25% instead of the 9% rate used above:

  • Your 36 month loan term is still shortened to 27 months
  • Your total interest paid has been reduced from $431 to $309, a savings of a whopping $122 which adds up to a 29% reduction on interest
  • $122 on $1,000 is 12.2% of the principal!

Now that we are scaling these calculations up to higher interest rates, let’s scale it out again for higher loan amounts:

At $10,000 and 25% interest, the 12.2% still applies, so you’ve saved $1,222 in interest payments. That’s a lot of money. At the $25,000 maximum the savings are a whopping $3,050!

The 1% rule
I like the 1% rule because it’s easy to calculate and easy to do. No matter how much you borrow and no matter how much your interest rate, a 36 month Prosper loan will always be reduced to 27 months by simply paying 1% of the loan amount on top of your regular payment.

 


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One Response


WealthBoy | August 5th, 2008 at 7:21 am

Simple rules of thumb like this can really provide tremendous benefit to people because they are so easy to follow. Very well done.


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