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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|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com
**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000|
|6.26% – 14.87%1||$5,000 - $100,000|
|6.99% – 35.97%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|4.99% – 29.99%3||$10,000 - $35,000|
|5.99% – 18.99%4||$5,000 - $50,000|
|15.49% – 34.49%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|