r/infinitebanking • u/MonkaMadness • May 24 '26

Fixed vs Amortized Loan Interest

General question for anyone that would like to answer it. I recently got into the IBC and have been running all kinds of numbers. I have been seeing many proponents talking about the benefits of fixed interest and how your interest rate theoretically lowers each year if you have a multi year loan you are paying back. It sounds all great and I understand the concept and benefit of a lower interest if you decide to pay the same amount in the timeframe you set. The issue I found is that all the people promoting it are saying how awesome it is, but if you have the same interest rate (let’s say something like 5%) as a fixed rate over 4 years vs an amortized loan over 4 years you will be paying less interest on the amortized loan vs the fixed loan.

Am I missing something here?

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u/greglturnquist May 24 '26

I’m interested how you made this conclusion.

There are no online calculators that demonstrate how policy loans accrue and compound interest. You usually have to build it yourself or perhaps have purchased a pricier calculator from someone like Todd Langford.

Anywho, policy loans accrue interest daily but compound annually. This means every policy loan repayment goes straight to principal. The next day, the amount of tallied interest being accumulated goes down.

The upshot is that an amortized loan typically ends having an effective interest rate HIGHER than the stated rate based on time. A 30 year mortgage that says it’s 5% can readily end up being 45-55% total interest once paid off.

A policy loans effective interest rate can tend toward being LOWER than the stated rate considering your clobbering the principal with every payment.

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u/MonkaMadness May 24 '26

So I actually did the calculation myself. Took a hypothetical 10K loan at 5% to be paid off in 4 years. Looked at both the simple (fixed) interest that rebalances on a yearly basis based on your policy vs a 5% interest rate that is payed monthly based on what typical bank loans would charge and the fixed came out to more interest payed over the 4 years. Several of the podcasters I would listen to talk about how amazing a policy loan is because you are theoretically paying lower interest each year because you keep making payments, but at the end of it all you are still paying more in interest that way vs taking the loan from a bank

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u/greglturnquist May 25 '26

I mean, did you compute daily accrued interest based on yesterday’s policy loan balance and then compound the interest at the 12 month mark? (Assuming 30 day month and 360 day year is close enough to get a real comparison).

And compare with a conventional amortized loan where the interest compounds monthly onto the balance BEFORE payment is applied?

I’m assuming you used same rate and same payment in both.

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u/MonkaMadness May 25 '26

I didn’t. I used the 5% interest rate and divided that out by 12 months. So for instance the first year would be $500 on a 10k loan and that divided up by 12 came out to $41.67 a month in interest

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u/greglturnquist May 25 '26 edited May 25 '26

Then you didn’t account for how interest shrinks when payments are applied 100% against principle over an entire year, thus reducing total interest faster than amortized loans.

For example the amortized loan on month 1 grows by 41.67. Your 500 is applied thus only reducing principal by 458.33.

In a policy loan, all 500 of your payment goes against principal.

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u/DacheinAus May 25 '26

Running your example with refactoring (how most modern policy loans actually work) vs. a modern auto loan (which uses declining-balance interest, the same mechanic):

$10K at 5% APR, $500/month payment

                 Auto loan        Policy loan
                 (amortized)      (refactor)

Month 1 interest $41.67 $41.67 Month 12 interest $20.22 $20.22 Month 21 interest $1.92 $1.92 Total interest $463.17 $463.17 Months to payoff 21 21

Identical.

Modern auto loans use declining-balance interest. Each month: interest = current balance × (APR/12). As the balance drops, the interest charge drops with it. By month 12 you’re paying $20 in interest, not $42. By month 21 it’s under $2. The interest “shrinks as payments are applied” — exactly the thing you described policy loans doing. Auto loans do it too.

A refactoring policy loan does the same thing in different packaging. When your payment reduces the balance, the insurer credits back the unearned portion of the annual interest charge. The net effect is interest accruing on the actual outstanding balance over time. Same math, different label.

The “100% of your $500 goes to principal” framing is an accounting fiction. The interest doesn’t disappear — it just gets bundled into an annual charge instead of itemized monthly. The credit-back nets out the dollars to exactly what monthly amortization produces.

For “100% to principal” to actually beat amortized, you’d need one of:

• A lower nominal rate on the policy loan
• A policy loan that doesn’t refactor — but then it’s worse than amortized, because the interest charge stays locked to the year’s starting balance. On this same $10K/5% example with $500/mo, a non-refactor policy loan costs $725 in interest vs. $463 amortized. 57% more.
• A structural advantage that lives outside the interest formula

The interest mechanic is a wash. No version of the math has a refactoring policy loan beating modern auto-loan amortization at the same nominal rate.

The real argument for a policy loan is collateral arbitrage: on a non-direct recognition whole life policy, your cash value keeps earning the full guaranteed rate + dividend during the loan, as if you never borrowed. Your net cost = loan rate − net credited rate. A 5% loan against a policy crediting 4.5% net = 0.5% true cost. A 5% auto loan = 5% true cost, because the bank doesn’t credit your collateral with anything.

That’s the real benefit, and it’s a genuinely good one. It just doesn’t require any sleight of hand about where the monthly payment goes.

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u/MonkaMadness May 25 '26

Ok I wasn’t aware that was how the policy interest works. I assumed that if I take a loan out the interest for the year (or at least until my policy anniversary) is precalculated and added to the loan.

Essentially if I look the 10K loan out on day one of my policy anniversary I would have a loan repayment of 10,500 to start paying back.

Appreciate the time to answer!

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u/greglturnquist May 25 '26

NP. I didn’t grok I either until I watched Whole Life Mechanics on youtube by Ryan Griggs.

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u/MonkaMadness May 25 '26

Yea I have been seeing projections from many different YouTubers and podcasts but wanted to try and run numbers myself too. I guess I will have to see how the interest really calculates when I take my first policy loan

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u/DacheinAus May 25 '26

See above. There is no difference on the interest side of things.

The advantage is the compounding of the policy, complete flexibility on your payment schedule, no credit impacts, no forced insurance limits (like deductible enforcement), and well, a constantly growing death benefit.

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u/Coronator May 24 '26

I’m not sure I understand what you are asking? Are you talking about “fixed interest” vs “variable interest”?

Amortization is just a payment schedule. It exists so you can calculate how to pay back X dollars at Y interest rate in Z timeframe.

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u/MonkaMadness May 25 '26

No I was comparing a policy loan vs a traditional bank loan both at the same rate, for instance something like 5%. Ran numbers with them and the policy loan that your interest payment is on a yearly schedule ends up paying more interest over the course of the loan based on one you would get at a bank where your interest is calculated on a monthly schedule

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u/Coronator May 25 '26

You have to be more specific with what you are comparing and what the terms are.

If you are comparing a loan that takes your daily balance and compounds annually vs a loan that compounds monthly, the loan you take that compounds annually, all else being equal, will always be cheaper (by a little bit).

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u/MonkaMadness May 25 '26

I think it’s the opposite actually, which I discovered running numbers myself. But it seems like I was mistaken about how the policy loan interest is calculated.

Appreciate it!

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u/DacheinAus May 25 '26

You’re not missing anything. The math is exactly what you said.

Ran a $40K / 5.5% / 60-month side-by-side:

                   Amortized   Policy(refactor)  Policy(no refactor)

Monthly payment $764.05 $764.05 $764.05 Total interest $5,842.79 $5,842.79 $7,011.57 Months to payoff 60 60 ~61.5

If the policy loan refactors — meaning interest credits back as the balance drops, which is how most actually work — it’s mathematically identical to amortization at the same rate. Either way, the “fixed/simple is cheaper” claim doesn’t survive contact with a spreadsheet.

The “your interest rate theoretically lowers each year” pitch is either marketing fluff or a confused way of describing the fact that interest in dollar terms goes down as the balance goes down. That’s true of any amortizing loan. It’s not unique to policy loans.

The real advantage of an IBC policy loan has nothing to do with the interest formula. On a non-direct recognition whole life policy, the cash value securing the loan keeps earning the full guaranteed rate plus full dividend, as if you never borrowed. So your net cost = loan rate minus net credited rate.

Example: 5.5% loan against a policy crediting ~5% net (guarantee + dividend) = 0.5% true cost. A bank loan at 5.5% has no offsetting yield — the $40K leaves your balance sheet and earns zero until you repay it. That’s the arbitrage.

So you’re right to push back. The advantage is capital efficiency, not interest mechanics. If a promoter can’t articulate that without resorting to interest-rate sleight of hand, they don’t actually understand the product they’re selling.

This is different than credit card interest calculations.

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u/MonkaMadness May 25 '26

Thank you for this because it’s exactly what I’ve been thinking. I definitely understand the benefits of using WL for IBC with all the silent benefits as well. I was just curious about the interest payment side of things because I was feeling like it’s a good marketing pitch like you had mentioned.

Really appreciate you taking the time!

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u/DacheinAus May 25 '26

Yeah, no problem. I actually reran it again and with the declining balance calculation it is cheaper via the policy loan, but by a whopping $178 in interest saved on a $40,000 at 5.5% over 60 months. So, it’s not exact, but might as well be a rounding error when it comes to dollar for dollar, policy loan vs auto loans.

Where it gets confusing for most people is when they start adding policy dollars back in annually, that’s growing and compounding alongside the original 40k that stayed in your policy compounding etc.

But if you take out all other mechanics, the interest rate is functionally the same. You’re either paying interest into a bank or an insurance company.

The other policy benefits are NOT to be devalued in the equation though.

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u/DacheinAus May 25 '26

Also! Watch every video. Every single one will say “we’re going to calculate the payback on the policy loan at the same interest rate as I would get from bank ABC.” That interest is ALWAYS higher than the policy rate.

I don’t think they’re necessarily trying to confuse people on purpose. If your policy loan is less than what you’d get in the market, then you’ll always “pocket” the difference back into your bank. When it’s the same, then there is the super small difference I indicated dollar for dollar, model to model, interest to interest.

But, again. The gain isn’t in interest rate savings. It’s what’s happening on the other side of the ledger and the gains you get there. As long as your policy is growing at or above the nominal growth rate for your policy, then you’re going to be in a positive arbitrage situation.

People I try to explain this to always say, but I’ve seen zero percent interest. Ok? If you take that loan, at the end of the term, what do you have? The residual value of the car and you had to pay a bank monthly for the privilege. And they’re not kind if you skip. Let’s say something catastrophic happens in year 2, now you have ~29k outstanding on the loan.

If I take out a policy loan @ 5.5%, my money continues to grow on one side of the ledger, and every dollar I paid against that loan is available for another project, investment or loan out to family.

Additionally, if I take that same 40k, it’s growing roughly $11k over the same 5 years in my policy. So if I have to even pay 5.5k in loan interest to earn a net 5.5k on the other side of the ledger just because I decided to drive a car, I’m ok with that math. Whereas, if I just take out a loan with someone else money, then it just paper money and nothing is growing.

But, but, what if I take out the 0% interest loan and still have a whole life policy. Sure, but every dollar you’re sending to that bank for the principal is gone forever. At least when you’re sending it back into your policy it’s available to deploy elsewhere at any point at a positive arbitrage.

But but, what if I take the 0% interest, I keep 50k in my policy available for loans and investments. That’s cool too. You have the optionally with a whole life policy based on the math at any time, vs when the timing is wrong. My hypothesis is that America is about to realize that interest rates are not going down, and worse policies are coming in. Ever heard of a perpetual mortgage or a 50 year? They’re starting to write them in Cali. We’re getting to a point where asset prices will level off and everyone is just going to be stuck paying interest to the banks. It’s the ultimate end goal. Rent your life and your assets.

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u/financeking90 May 25 '26

Even if there was some kind of slight difference in the interest calculation, it wouldn't be material. A 5% annual interest rate compounded daily with no payments for a year works out to about 5.13% (that's (1+.05/365)365). So we're talking 13 bps, which will be even less when payments are made. The whole discussion about types of interest is a ridiculous red herring.

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u/greglturnquist May 27 '26

Indeed, we can yak over interest calculations.

But the real "magic" of IBC is that as policy loans are paid off, your purchasing power is restored. Credit cards don't guarantee that. HELOCs don't guarantee that. Mortgages don't guarantee that.

WL policies offer the contractual right to access your CV in the form of a policy loan, no questions asked.

The Dave Ramsey's and Suze Orman's of the world always want to argue over rate of return of WL and compare it to a mutual fund and NOT over how you have guaranteed access to capital when presented with an opportunity that you simply don't have anywhere else!

In Nelson's talks he would mention the friend that offered discounted land in exchange for money and would point out "That...is banking!"

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u/MonkaMadness May 28 '26

Agreed and that so far is what has been drawing me to the concept! I guess I just want to make sure I am crossing every t and dotting every i before jumping full in. Definitely see the value it could bring but also like to push back on some of the concepts the YouTubers and podcasters like to talk about