Is it better to pay off small debt or large debt first?

Is it better to pay off small debt or large debt first?

There are two main schools of thought about setting up a debt payment plan. Learn what debt payment strategy is best for you.

One strategy is that you should pay off your debts from the highest interest rate to the lowest because this will save you the most money over time. The other school of thought says to pay off the debts from smallest to largest so that you can gain more momentum on your debt payment plan, which may help you to pay off the debts more quickly.

Regardless of what strategy you choose, with a solid plan in place, you can focus on getting out of debt as quickly as possible.

Paying Off Your Highest-Interest Debts First

For many, it makes sense to pay off the highest interest rate debt first because this debt is costing you the most money each month. You will save on interest in the long run, and you will free up even more money to put toward your other debts. However, if your highest-interest debt is your largest debt, you may spend more than a year paying it off. You may not feel like you are making any real progress or getting closer to your goal.

D. Thode and Associates Inc. Out of Debt

Paying Off Your Smallest Debts First

As you knock off your smaller debts one by one, you'll feel like you are actually making concrete progress toward your financial goal of becoming debt-free. You will also free up some extra cash once you pay off these smaller debts to put toward your next largest debts. However, a drawback of this debt payoff strategy is that you will still be paying interest payments on the larger debts, which can mean that you will end up paying more in interest in the long run.

Finding A Balance

Create a strategy that works the best for you to reach your financial goals as quickly as possible. You may have several debts that you know you can pay off in just a few months, and you may want to put those at the top of the list. Then you can determine if you want to work on the smallest debts or the highest interest rates first.

D Thode and Associates Inc., Out of Debt

If you have credit cards with the same interest rates, consider paying off the smallest balance first and then work on the largest.

You also may want to put the loans that save you on your taxes at the end of your debt payment plan. For example, your student loans, home equity loans, or a second mortgage. These debts may also have lower interest rates.

Consider your options and choose the plan that will save you the most, but also seems attainable.

At D. Thode & Associates, our Licensed Insolvency Trustees conduct an “assessment”. This is the first stage of debt management which provides for a financial appraisal interview, a description of statutory and non-statutory options that are available to an individual debtor, and a discussion on the merits and consequences of those options.

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