Which Debt Do I Pay First? (Part 2)

The last post gave a basic loan example to get us started. Let's make it more realistic today with the following example.


Loan 1 - $15,000. 10% interest. $15,000 x .10 = $1500 in interest payments each month.


Loan 2 - $5000. 5% interest. $5000 x .05 = $250 in interest payments each month.


Loan 3 - $5000. 20% interest. $5000 x .20 = $1000 in interest payments each month.




If I had extra money to put against the principle on a loan, which one would I want to put it against? My initial reaction would be to say loan 3. The reason is that I am paying the most in interest for each dollar I borrow on that loan. How do I figure that?


Loan 1 1500/15000 = I pay 10 cents per dollar borrowed
Loan 2 250/5000 = I pay 05 cents per dollar borrowed
Loan 3 1000/5000 = I pay 20 cents per dollar borrowed

Of course, another way of looking at this is to pay down Loan 1 because you are paying the most each month on that one.


Another option to consider is to use a lower interest rate loan to pay off the higher interest rate loans. You just need to make sure that there aren't any "set up fees" or other charges that will end up costing you more.







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