Toni may opt for a shorter loan period to minimize total interest payments, thus reducing the overall cost of borrowing. A longer repayment term, while offering smaller monthly installments, results in higher total interest paid over time.
Toni might choose a shorter time period to pay off a loan because it often results in paying less total interest over the life of the loan. With a longer loan term, although the monthly payments may be smaller, the borrower ends up paying more interest overall.
This is similar to the principle that when taking out a $1,000,000 loan, a person will end up paying more than twice the original loan amount over 30 years due to accumulated interest.
For example, if a $300,000 loan has a 6% interest rate and is paid over 30 years, the borrower will pay a significant amount in interest, making the total repayment amount much higher than the principal.
However, making larger payments or additional payments can reduce both the repayment time and the total interest paid, as demonstrated when making an equivalent of 13 payments per year instead of 12.
A calculation using the present value formula also shows that a higher monthly payment can significantly reduce the loan term and total interest paid on a $300,000 house loan.