So I was searching this topic, and came across this older post. But neither it, nor anywhere else I’ve been able to find talks about the real net effective interest rate that these plans have.
Yes, you can read about the penalty rate and interest rate, however, the way they apply payments is not typical of a standard amortization where you earlier payments go to mostly paying interest. The apply your payment to the principal balance in full until the principal is paid off. During that time, the interest and penalties accrue, but each month, the principal that these are calculated off of, is being reduced at a much greater rate than a standard amortization.
Then once you pay the principal off, then they apply the payments, in full, to the penalty accrued, and once that is paid off, finally they apply it to the accrued interest.
Note that once the principal tax due is paid off, the penalties and interest stop accruing as well.
This all has a big impact on the net effective interest rate you actually pay, compared to the traditionally amortizing loans. In my calculations of using 6% for interest and 3% for penalties that is a typical current example, the net effective interest rate is only 4.27% vs what one may think is the 9% they seem to purport.
I figured this out using actual installment plan history and also comparing the projected payoff time and payments for the installment plan to a traditional amortizing loan of the same amount, duration, and payment amount.
Anyway, just thought I’d share as there seems to be zero information about this fact that I could find and that it makes a big difference if you are looking at interest rate arbitrage. Finding an alternative investment to meet or beat what I thought was 9% from the IRS is a lot different than one that can beat 4.27%.