I got an email from my little sister the other day asking a question that gets asked quite often…
“Which debt should I pay off first?”
In most situations I recommend Dave Ramsey’s Debt Snowball method of paying off the debts from smallest to largest, starting with the lowest balance first. The reason being that many people need the “small victory” of getting a debt paid off to help keep them motivated.
In this particular case, I suggested something different.
Ok, so we want to pay off the last of our debt (not including our house) and I’m trying to figure out which one we should be aiming to pay off first…
- 6.625% interest rate
- Balance of around $7,500
- I pay $100 each month
- 5.84% interest rate
- Balance of around $9,500
- I pay $300 each month
I have heard you should pay off the one with the highest interest rate first, but I’ve also heard that student loans are ‘good debt’, so I’m not sure what to do…
1. The car loan is a collateralized loan, so if you can’t make the payments they will take your car. If you can’t pay your student loan, they can’t take anything from you (in most situations).
2. The balances in each are pretty close, so they are both going to take a decent chunk of change (and or time) to get them paid off. That being the case, when you get the car loan paid off you will have $300 extra to spend each month to pay down the other debt as opposed to the student loan which will only free up an extra $100 each month.
3. Student loans are pretty easy to defer or get forbearance – so if you lose your job, medical emergency, etc you can work out a deal and avoid making payments until things stabilize a bit. Your car lender would probably laugh in your face if you asked to defer payments.
Any other opinions about which debt to pay off first?