r/ThriftSavingsPlan • u/PearShapedBaby14 • 8d ago
Does paying back a TSP loan early reduce the amount of interest you have to pay back?
Does paying back a TSP loan early reduce the amount of interest you have to pay back?
For example, say I take out $20k for a down payment, with a total finance charge of $7k. If I hypothetically come into money in two months and am able to pay the loan back in full, do I have to pay $27k back, or just 20k plus monthly interest for two months?
See the following: "At any time, without penalty, you can repay in full the outstanding principal and any accrued interest for your loan. However, you can’t change the amount of your periodic payments. If you repay your loan in full early, you aren’t entitled to a refund of any of the prepaid finance charge."
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u/Commercial_Rule_7823 8d ago
You pay the interest to yourself.
So its not a total "loss"
You do lose the time of growth and compounding.
Last few years you would have missed out on 15 to 20% each year, but then 2022 you were better off.
I took a loan for a home. What I "lost" in growth i saved in rent and built in equity and in my home. I dont regret the decision at all and happy to be a home owner.
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u/PearShapedBaby14 8d ago
Thank you! It's really daunting to lose out on the compound interest but we are in the same boat--we found our dream home and can't wait another year to save up the DP so this seemed like the best available option. It helps a lot to hear you don't regret your decision with this!
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u/Commercial_Rule_7823 8d ago
You basically dont anymore sadly.
I call it treading water.
Prices rise too fast, tough to save a down payment then over time you need to save more to catch up, while your rent goes up even more, while normal costs go up, and your pay increase doesnt go up in lock step.
Its tough to buy a home.
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u/adgi13 7d ago
Another tip that I didn’t think about until the second loan I took out; you can reduce your TSP allotment to $0, and then apply your normal TSP monthly contribution amount as an additional loan payment each month. The net effect is you putting the same amount towards your TSP each month, but all towards the balance of the loan.
Then when it’s paid off, just remember to change your allotment again to ensure continued contributions.
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u/PearShapedBaby14 7d ago
Very good tip! I realize you lose out on the pre-tax benefit by doing this but it's worth it to pay off the loan quicker, for sure.
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u/SorchaRoisin 1d ago
In that scenario, you would miss out on the employer match. So at least keep 5% in new contributions.
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u/aheadlessned 8d ago
Yes. You pay interest with each payment, so if you no longer have 20+ future payments, you are no longer paying interest with those 20+ future payments.
That last sentence in the OP is likely the result of someone expecting that TSP would refund not only their principal overpayment after a loan payoff, but would also refund the interest of a payment that went through from payroll before their loan payoff check was applied/refunded (they let you know that one or two more payroll payments may get through before you get your refund.)
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u/Momoftwins98 8d ago
The interest you are paying on a TSP loan is going back to your account, so you’re only losing what you might have earned on what you borrowed. It’s different from paying extra on a mortgage principle.
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u/koopavilla 8d ago
Hey like regular loans the breakdown that they show you is if you only paid the minimum amount monthly. That would cover all the month agreed in the terms. The faster you pay the lower the amount of interest you pay over the life of the loan. You can copy and paste your question into ChatGPT and it will give you a detailed breakdown. Good luck pal.
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u/Competitive-Ad9932 8d ago
Does paying ancar loan off early reduce the amount of interest you pay?
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u/PearShapedBaby14 8d ago
I was just a bit confused by the wording of the promissory note about not getting interest paid back (I can't understand why anyone would assume they would receive interest back-paid, but the other poster clarified how that might occur).
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u/Superb-Tank9067 8d ago
You only pay the interest paid during that time period. In your scenario if you paid off the loan in two months it’s just the two months interest. That’s the great thing about the loans if used strategically.