Questions: 3. Which of these statements best explains why it's often a good idea to pay* 1 point more than the monthly amount due on an amortized loan? Every time you pay extra, the lender will reduce the interest rate they're charging by a small amount The extra payment will be applied to the principal amount you owe, which will pay down your debt more quickly The extra payment will be applied to the interest you owe, which will reduce the overall cost of your loan Amortized loans typically have much higher interest rates than credit cards, so they're the best place to put your extra cash

The answer is: The extra payment will be applied to the principal amount you owe, which will pay down your debt more quickly.

Explanation for each option:

1. Every time you pay extra, the lender will reduce the interest rate they're charging by a small amount:

   • This statement is incorrect. Paying extra on an amortized loan does not typically result in a reduction of the interest rate. The interest rate is usually fixed or variable based on the terms of the loan agreement, but it is not directly affected by making extra payments.

2. The extra payment will be applied to the principal amount you owe, which will pay down your debt more quickly:

   • This statement is correct. When you make an extra payment on an amortized loan, the additional amount is usually applied directly to the principal balance. This reduces the principal faster, which in turn reduces the amount of interest you will pay over the life of the loan, allowing you to pay off the debt more quickly.

3. The extra payment will be applied to the interest you owe, which will reduce the overall cost of your loan:

   • This statement is partially correct but misleading. While paying extra does reduce the overall cost of the loan, it is because the extra payment is applied to the principal, not directly to the interest. Reducing the principal reduces the amount of interest that accrues in the future.

4. Amortized loans typically have much higher interest rates than credit cards, so they're the best place to put your extra cash:

   • This statement is incorrect. Amortized loans, such as mortgages or car loans, often have lower interest rates compared to credit cards. Credit cards usually have higher interest rates, so it would generally be more beneficial to pay down credit card debt first if you have extra cash.

In summary, the best explanation for why it's often a good idea to pay more than the monthly amount due on an amortized loan is that the extra payment will be applied to the principal amount you owe, which will pay down your debt more quickly.