# The most efficient way to pay off loans/credit? [duplicate]

Supposed you have a fixed amount of money to commit every month to debt repayment... well above all minimum payment requirements. All other quirks and conditions being equal. The only differences are the interest rates and the balances. That said, Ive frequently seen it written that the best way to pay off your debts is to pay minimums on all but the highest interest rate loan, where you dump any surplus money.

But I am wondering if this is necessarily the optimum way of doing it?!?!

Doesnt it make more sense to pay off whichever loan is accruing the most in interest every month in terms of dollar amount? Not percentage. i.e. the product between balance and interest rate. Or am I wrong about this?

The wisdom that you have "frequently seen written" is in fact correct.

You must pay off at least the minimum required amount on each of your loans and credit cards. If you have further surplus cash available to pay down your debts, your best option is indeed to pay off the loan with the highest interest rate.

If one loan is accruing more interest each month because that loan has the highest balance you should ignore that fact. You should be looking at how to get the "best bang for your bucks". The question becomes: Am I better off using my spare (say) \$1000 to avoid paying interest at 21% per annum on my credit card - or am I better off using my spare \$1000 to avoid paying interest at 10% on my car loan?

You can reduce your interest charges in either loan by paying the balance down - but you get a bigger reduction in interest charges by paying down the high-interest-rate loan.

If you still need to convince yourself, try modelling it out in a spreadsheet and compare the total amount owing after making optional repayments under various scenarios.

No, you are incorrect in your reasoning. As you pay down a loan, you reduce the interest you will pay in the future. For simplicity's sake, let's assume you have two debts:

• A credit card debt of \$30,000 which is charged 20% interest per year
• A mortgage loan of \$300,000 which has 3% interest per year.

To keep our example simple, we'll assume that you make one payment to each loan per year and the minimum payment is just whatever interest is accrued.