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The math will tell you to pay off the one with the highest interest rate first regardless of the amount. Those who follow Dave Ramsey will tell you to pay off the lowest amount first because the successes in paying off each loan will psychologically boost you into paying off each successive loan and then you will have more money to pay on each successive one because you don't need to pay the others. It really depends on you, financially you should pay off the highest interest first, if you need those successes to keep you going then pay off the lowest balance first.
Thank you for the response - I plan on paying off the highest interest rate first. But my question is when you have 2 loans with the same interest rate, then do you pay off the highest or lowest balance of the two first?
Thank you for the response - I plan on paying off the highest interest rate first. But my question is when you have 2 loans with the same interest rate, then do you pay off the highest or lowest balance of the two first?
In that circumstance, pay off the lower balance first. It will close the account and positively impact your credit record. A history of properly paid off obligations is a serious plus on one's credit score, as opposed to having ongoing balances on the two accounts.
Note: My comments assume that you plan to maintain current payments on ALL the loans, with the majority of funds designated for paying off the smaller accounts first. It is highly advisable to NOT default on any obligations.
Last edited by Pilgrim21784; 07-09-2013 at 05:59 PM..
Thank you for the response - I plan on paying off the highest interest rate first. But my question is when you have 2 loans with the same interest rate, then do you pay off the highest or lowest balance of the two first?
Mathematically, if your interest rate is the same, you should pay down the higher loan first. The interest is accruing based on the balance.
But if one of your loans is only $783, I would just pay that one off first. I agree it would be a great morale boost to pay that loan in less than 2 months.
Mathematically, if your interest rate is the same, you should pay down the higher loan first. The interest is accruing based on the balance.
But if one of your loans is only $783, I would just pay that one off first. I agree it would be a great morale boost to pay that loan in less than 2 months.
Sorry, truly no offense intended, but your statement bolded above is totally incorrect. (We former accountants are picky about mathematical accuracy.) At the same interest rate, whether one pays X on one loan or .5X on two loans has no effect on the amount of interest being paid on the principal amount, whether on 1 or 2 loans.
I suspect you're confusing the fact that the portion of INT to PRIN for Z payment amount on older/lower balance versus newer/higher balance loan amounts is indeed different. However, the amount of interest paid on Y amounts of principal is identical at the same rates.
I know that may sound a bit confusing but its true. The INT/PRIN composition for a given payment amount is indeed quite different between newer versus older loan payment schedules for two loans. BUT - identical interest rates on the loans create identical interest charges on the principal, whether in loan 1 or loan 2.
Last edited by Pilgrim21784; 07-09-2013 at 07:25 PM..
Mathematically, if your interest rate is the same, you should pay down the higher loan first. The interest is accruing based on the balance.
As Pilgrim said, this is wrong. If you have a fixed amount of money to throw at paying down debt for loans at the same interest rate, you will save the exact same amount in interest no matter how you divide it up. Balance is irrelevant.
Imagine you have 2 loans at 12%, so every month 1% accrues. One has a $5,000 balance and the other a $10,000 balance. You have $2,000 extra cash. So whether you put it all at the first, all at the 2nd, split 50/50, or any other combo, you're still just paying off $2,000 in total principal and saving $20 in total interest for the next month.
So if I have two loans at 6.8% interest.... one $1000 and one $3000... I could put all my extra monthly income towards the $1000 loan to pay it off sooner and get a credit score boost. Then when I am finished move on too the $3000 loan.
That would be the same as paying off both 50/50 with my extra income, and delaying the credit score boost. Am I understanding this correctly?
I would suggest paying off your highest interest rate loans first; pay off the lower balance first to close out the loan...it'll boost your credit score and it will feel good. Secondly, I would extend the lowest interest rate loan to 25-year repayment. The money you "save" you can apply to the higher interest rate loans and you'll pay less over time.
Most importantly, you must state that you want to apply the extra payments to the principal and not advance the due date, in order actually save anything; otherwise the loan holder will still collect the same projected interest but instead will lower your monthly dues.
My wife had $230K in student loans at a weighted average 6.72% interest when we married 5.5 years ago; we now owe $40K at 3.5%. I would also suggest you look into any financial incentives offered by your loan holders. We received a few interest rate deductions by making consecutive on-time payments, setting up automatic payments, and consolidating some loans.
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