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I had a discussion with family members about how taking a loan to pay another loan with the same interest is basically wasting money and they didn't agree.

To make things clearer, say loan 1 is 100 000 $ \\\$ $ with a fixed monthly rent of 10 % in a 10 months (to make the numbers nicer). When loan 1 has 50 000 $ \\\$ $ left you decide to take a loan 2 to pay of the remainder of loan 1 before the ten months are completed. Now here is where the disagreement starts. I say that you have to pay the 50 000 $ \\\$ $ plus an interest of the remaining 50 000 $ \\\$ $ (I assume it's 10 %, but in a real case scenario it might be different) and then on loan 2 you would have to continue with a 10 % interest on loan on the 50 000 $ \\\$ $. In the end you would thus lose money by taking a second loan. So my question is then: Is my assumption of having to pay interest on the remaining 50 000 $ \\\$ $ in loan 1 incorrect or correct?

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  • $\begingroup$ Check the contract of the actual loans because they are not always the same as the theoretical mathematical model. $\endgroup$ Feb 7, 2023 at 9:47

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If you pay back the outstanding debt on the first loan with a new loan (and there is no penalty for doing so), you do not pay interest or anything else for the first loan anymore. You paid your debt. If you think it through, what should you pay interest for without any debt outstanding.

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If you take a loan from now (February $2022$) for $2$ years until February $2024$, it’s the same as taking a first yearly loan from now until February $2023$, and then a second yearly loan until February $2024$.

You pay interest twice in either case.

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