Which Loan Should I Pay off First? 3 Strategies to Consider

which loan should I pay off first

Paying off debt is at the top of many people’s to-do lists, but successfully doing so isn’t always easy. Those with multiple loans may feel overwhelmed and wonder, “Which loan should I pay off first?”

There are a few different repayment strategies that are useful. When deciding what to pay off first, you need to consider your debt load, your motivation, and the math.

Gather all your loan information

The first step to creating a debt payoff plan is to write down all the information about your loans. For the sake of simplicity, we’ll use the following examples:

  • A $20,000 auto loan with an 8.00% APR, a five-year term, and a $406 minimum monthly payment.
  • A $200,000 mortgage with a 4.50% APR, a 30-year term, and a $1,013 minimum monthly payment.
  • A $15,000 student loan with a 5.00% APR, a 10-year term, and a $159 minimum monthly payment.
  • A $3,000 balance on a credit card with a 15.00% APR and a minimum monthly payment of $60.

Keep in mind that you don’t have to have all of these types of loans to make these strategies work. For example, if you’re only trying to pay off credit cards or student loans, the same rules apply.

3 smart debt repayment strategies

Now that you have all of your loan information together, the next step is to decide what to pay off first.

If you only make the minimum payments on each loan or card every month, this would be your debt payoff schedule:

  • Auto loan: Paid in five years with $4,332 in interest.
  • Credit card: Paid in 6.4 years with $1,737 in interest.
  • Student loan: Paid in 10 years with $4,092 in interest.
  • Mortgage: Paid in 30 years with $164,813 in interest.

Overall, it’d take you 30 years to become entirely debt-free, and you’d pay $174,974 in interest. But if you want to pay it all off sooner and with less interest, there are a few approaches you can take.

Common strategies include focusing first on the highest interest rate, the lowest balance, or the somewhere in between.

1. Highest interest rate first

Mathematically, you’ll usually pay off your debt more quickly – and with less interest – if you go this route.

Also known as the debt avalanche method, you pay off your debt with the highest interest rate first while paying the minimum on your other accounts.

It’s also helpful to find a way to add some extra money toward your debt payments each month. You can do this by either cutting back on other expenses or earning a little extra cash on the side.

Once you pay off the first loan or card, apply its minimum monthly payment and any extra payments to the loan or card with the next highest interest rate, and so on.

Taking our example above, if you were to add an extra $100 per month to your minimum payment – through budgeting or earning more money – here’s how the payoff schedule would look:

Credit card: Paid in 1.8 years

An extra $100 is available, plus the $60 minimum credit card payment. The new monthly total is $160 per month. You’ll pay $391 in interest.

Auto loan: Paid in four years

An extra $160 is available after you pay off the credit card, plus the $406 minimum auto loan payment. The new monthly total is $566 per month. You’ll pay $3,551 in interest.

Student loan: Paid in 5.2 years

An extra $566 is available after you pay off the auto loan, plus the $159 minimum monthly student loan payment. The new monthly total is $725 per month. You’ll pay $2,735 in interest.

Mortgage: Paid in 16.2 years

An extra $725 is available after you pay off the student loan, plus the $1,013 minimum mortgage payment. The new monthly total is $1,738 a month. You’ll pay $92,129 in interest.

As you can see, using this method and extra payments cuts almost 14 years off your debt payoff schedule. You’ll also save $76,168 in interest.

Using the debt avalanche approach is good for those who want to pay off their debt and save as much money as possible. In some cases, you’ll also pay off your debt sooner.

But for people who need small wins to keep them going, the debt snowball method may be better.

2. Lowest balance first

With the debt snowball method, you focus on paying down the loan or card with the smallest balance first. Once the first balance is paid off, you’ll apply that monthly amount you were paying toward the next one on the list, and so on.

Because you’re paying off smaller balances first, you can enjoy small wins every time you finish off a loan. But depending on your loans, that doesn’t always happen.

Here’s how your payoff plan looks using the debt snowball method and $100 in extra payments per month:

Credit card: Paid in 1.8 years

An extra $100 is available, plus the $60 minimum monthly credit card payment. The new monthly total is $160 per month. You’ll pay $391 in interest.

Auto loan: Paid in 4.3 years

An extra $160 is available after you pay off the credit card, plus the $406 minimum auto loan payment, for a total of $566 per month. You’ll pay $3,855 in interest.

Student loan: Paid in 5.2 years

An extra $566 is available after you pay off the auto loan, plus the $159 minimum monthly student loan payment. The new monthly total is $725 per month. You’ll pay $2,556 in interest.

Mortgage: Paid in 16.2 years

An extra $725 is available after you pay off the student loan, plus the $1,013 minimum mortgage payment. The new monthly total is $1,738. You’ll pay $92,209 in interest.

In this case, you’d be making payments on the auto loan longer than you would if you were using the avalanche method. All other debts will be paid off around the same time, but you’ll pay an extra $205 in interest.

3. Equal treatment

If you’d rather see all of your balances decrease more quickly at the same time, divide the extra $100 equally among the different loans.

But if you do this without applying payments from paid-off loans to the next one in line, your debt payoff will take significantly longer:

  • Credit card: Paid in 3.9 years with $982 in interest.
  • Auto loan: Paid in 4.7 years with $4,009 in interest.
  • Student loan: Paid in 8.3 years with $3,366 in interest.
  • Mortgage: Paid in 28.6 years with $155,548 in interest.

Going this route, you’ll pay off your debt just around a year and a half early. You’ll only save $11,069 in interest.

Which loan should I pay off first?

The best debt payoff strategy is different for each person. The most important thing is to choose one that keeps you motivated. If you’re serious about debt payoff, try the debt avalanche or snowball method. These are better options than only adding a little to each loan every month.

To find out which of the two methods is better, use an online calculator to do the math. If your situation is more simple, use a prepayment calculator to see how extra payments can help you pay off your debt faster.

If you find yourself losing motivation, consider trying another strategy. Also, try other tips and tricks to get out of debt. As you stay committed to your goal, you’ll be better off in the long run.

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1 Includes AutoPay discount. Important Disclosures for SoFi.

2 Important Disclosures for Citizens Bank.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.29% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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