Most resources seem to indicate that you want to pay down loans in order of decreasing interest rate. However, I did some manual calculations and found I should be paying down the loans based on the size of their interest (not the interest rate). Am I miscalculating something?
For example, I have loan A for $3,500 at 4.66% and loan B for $1,300 at 5.00%. Both loans have a minimum payment of $40. Below is the amortization schedule for the first 20 months or so.
Loan A | Loan B
# Remaining Interest Remaining Interest
01 $3,500.00 $13.59 $1,300.00 $5.42
02 $3,473.59 $13.49 $1,265.42 $5.27
03 $3,447.08 $13.39 $1,230.69 $5.13
04 $3,420.47 $13.28 $1,195.82 $4.98
05 $3,393.75 $13.18 $1,160.80 $4.84
06 $3,366.93 $13.07 $1,125.64 $4.69
07 $3,340.00 $12.97 $1,090.33 $4.54
08 $3,312.97 $12.87 $1,054.87 $4.40
09 $3,285.84 $12.76 $1,019.26 $4.25
10 $3,258.60 $12.65 $ 983.51 $4.10
11 $3,231.25 $12.55 $ 947.61 $3.95
12 $3,203.80 $12.44 $ 911.56 $3.80
13 $3,176.24 $12.33 $ 875.36 $3.65
14 $3,148.58 $12.23 $ 839.00 $3.50
15 $3,120.80 $12.12 $ 802.50 $3.34
16 $3,092.92 $12.01 $ 765.84 $3.19
17 $3,064.93 $11.90 $ 729.03 $3.04
18 $3,036.84 $11.79 $ 692.07 $2.88
19 $3,008.63 $11.68 $ 654.96 $2.73
20 $2,980.31 $11.57 $ 617.68 $2.57
....
If I make an extra payment of $500 to loan A, I reduce the principal to $3,000. I've essentially skipped the first 18 payments and thus I've saved about $228.63 in interest payments.
For loan B, the same $500 would skip about 14 payments, totaling $62.50 in interest. Because of the low balance, most of my payment was already going towards the principal.
