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How To Know Which Debt You Should Pay Off First

Miranda Crace7-Minute Read
UPDATED: July 19, 2023


Debt can pile up, even if you stick to a budget. Maybe you had an emergency and needed a credit card to cover the expenses, or maybe you’ve recently graduated and are beginning to repay your student loans. With monthly interest rate charges and balances that don’t seem to be getting smaller, your debt could make you feel like you’re stuck.

It doesn’t have to be that way, though. Becoming debt-free all starts with figuring out which loan you need to pay off first. In the next few moments, let’s learn how to determine which debt should be your first priority. We’ll also explore some of the more popular repayment methods.

Figuring Out Which Loan To Pay Off First: Factors To Consider

Throwing money at a large balance until it gets smaller may whittle down your debt eventually, but there are more strategic ways of paying off your debt that could get you to the finish line sooner. The trick is knowing which debt to pay off first.

With debt, three of the most important factors are your interest rate, balance total and debt type. Here’s a breakdown.

  • Interest rate: Your interest rate is a percentage you pay that represents the cost of borrowing the loan – the higher the percentage, the more you pay. Your interest rate will depend largely on your credit score when applying for the loan.
  • Balance total: Your balance is the total amount of money that still needs to be repaid on a loan. When you make a monthly payment, some of that payment goes toward interest, and the rest toward the balance.
  • Type: Debt can come in many forms and can affect your credit history in different ways. For example, your revolving debt could hurt your credit score more than installment debt if you have a high credit utilization rate.

If you have multiple types of debt with varying interest rates and balances, comparing the above factors can help you decide which loans to tackle first.

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Ways To Pay Off Your Debt: 3 Common Repayment Plans

Below, we’ll consider in detail three of the most popular strategies for paying off debt.

1. Debt Avalanche Method

Ignoring interest rates can be a big mistake when paying off debt. High-interest debt can cost you more the longer you have it, so it makes perfect sense to pay off the loan with the highest interest rate first. The nickname for this tactic is the “avalanche method.”

When utilizing the avalanche method, put your largest payments toward the loan with the highest interest while making the minimum payments to your other debts. This way, you can chip away at the high-interest loan while still keeping up on your other payments. Once the high-interest loan is paid off, direct your larger payments to the loan with the second-highest interest rate and so on, until you’ve paid them all off.

One downside to this method is that it could be a long time before you start seeing results if your high-interest loan has a large balance. If you want to see the fruits of your labor sooner, you may prefer the next method instead.

2. Debt Snowball Method

Often called the “snowball method,” the act of paying off your smaller loans first can help you feel some real progress in your debt repayment. Look at the balances of each of your debts. Focus your larger payments on the one with the lowest balance. Once that’s paid off, direct your payments toward the second smallest loan.

Some people have found “snowballing” their debts to be the more satisfying method, but the key to success is to keep applying the same amount to the next loan after knocking one out. Eventually, you’ll just have the one large debt to face.

3. Debt Snowflake Method

You can also strike a balance between the two methods described above by using the debt snowflake method. This strategy works by increasing your income and applying your extra earnings to either the debts with the highest interest rate or the smallest balance. You can also choose to pay off the loan that’s hurting your credit score the most.

For instance, if you have an auto loan you’ve made late payments on and the lender is preparing to repossess your car, it might be wise to use the snowflake repayment method to quickly pay off your car loan. This can help you avoid losing your vehicle, giving you the ability to travel to and from work.

It’s also important to remember that to use the debt snowflake method, you’ll probably need to pick up a side gig or second job. While this can be a labor-intensive route, it can significantly speed up the repayment process.

Alternative Repayment Methods

Not everyone will have the time or means to attack their debt head on with the snowball, avalanche or snowflake method.

If that’s you, consider the upcoming alternative strategies for managing your debt.

Refinance Your Loan

Some loans will allow you to refinance them for a lower interest rate and monthly payment. This can be especially helpful for students with federal or private loans. Speak with your lender about your refinancing options – you could save yourself some time and money.

Consolidate Your Debt

For many borrowers, keeping track of multiple loans is a major part of the struggle. This is why some opt for debt consolidation to turn multiple debts into a single monthly payment.

Common forms of debt consolidation include the options we’ll examine next.

Home Equity Loan

A home equity loan allows you to borrow money against the equity you’ve built in your home. A major risk with this type of loan is that your home serves as collateral, meaning you could lose it through the foreclosure process if you fail to pay off your debt.

Home Equity Line Of Credit

Often abbreviated as HELOC, this is similar to a home equity loan in that you’re borrowing against your home’s equity, but you have a line of credit instead. Similar to using a credit card, you borrow from the HELOC and repay it as you go. Again, your home is collateral in this deal, and defaulting could mean you lose the house through foreclosure.

Balance Transfer Card

Much like it sounds, a balance transfer takes the balance from one or more credit cards and moves it onto a new card – in many cases, one with a 0% APR introductory period.

This introductory period typically lasts a year, and if you can pay off the debt within that time frame, you can save yourself from high interest charges. A year may be too short of a time for some debts, though, so if you have a high balance, you may want to consider other ways to get out of credit card debt.

Personal Loan

A personal loan can act as a debt consolidation loan and can be used for many different expenses. You can use the loan to pay off your other debts, and then you’ll only have the one loan to worry about. Getting a personal loan is a relatively straightforward process that starts with finding the right lender. Keep in mind that rates, terms and loan amounts vary from one lender to another.

Rocket Loans℠ offers loans from $2,000 to $45,000 for a debt consolidation personal loan, and we offer same-day financing – meaning you could receive your money the same day you’re approved.1

Ready To Improve Your Financial Life?

Apply for a personal loan today to consolidate your debt.

FAQs About How To Decide Which Loans To Pay Off First

With the answers to these frequently asked questions, learn more about paying off your debt.

Is it better to pay off small loans first?

As mentioned above, some people may prefer the snowball method of paying off smaller loans first because it can more quickly showcase the results of your repayment strategy. Ultimately, though, your higher-interest loans will cost you money every month they go unpaid. A combination method may be ideal if you have multiple loans with similar interest rates.

Which student loan should I pay off first?

The snowball and avalanche methods can both be applied to federal and private student loans, and the decision is ultimately up to the one repaying the loan. However, many borrowers may find that focusing first on any private student loans saves them money in the long run.

Private loans tend to have higher interest rates than federal student loans, and private loans may also have more limited repayment options or opportunities for loan forgiveness.

Is it better to pay off subsidized or unsubsidized student loans first?

The U.S. Department of Education offers both subsidized and unsubsidized loans to qualifying students with financial needs. The differences between these two types of loans will influence which loan you’ll want to pay off first.

Since unsubsidized loans charge interest regardless of your situation and accrue more quickly over time, it makes sense to target those first – particularly the loans with the highest interest rates. Follow up by paying off any subsidized loans with high interest rates.

Once your higher-interest loans are paid off, you should again target your remaining unsubsidized loans first, followed by your lower-interest subsidized loans.

Is it better to pay off a loan early?

If you’re financially able and your loan has no prepayment penalty, it could be worth paying off your loan as early as possible. You could save money by paying off higher-interest loans and enjoy having one less monthly payment in your life.

But before you throw all your money at your loans, consider your budget. Can you afford to make those additional payments per month? Do you have other debts you still need to pay? If you don’t have any savings stored away, it might benefit you more to put that extra money toward building an emergency fund.

Final Thoughts

Getting out of debt can seem impossible sometimes, but how you approach your repayments can make all the difference. Decide whether you want to first pay off your loans with the highest interest rates or instead knock out loans with lower balances. A combination of the two methods may yield ideal results.

Aside from those approaches, you may have refinancing options available for your loan. Or, you may choose a debt consolidation loan to more easily manage your debt.

If you’re considering a personal loan for debt consolidation, get started today with a prequalification from Rocket Loans.

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Miranda Crace

Miranda Crace is a Senior Section Editor for the Rocket Companies, bringing a wealth of knowledge about mortgages, personal finance, real estate, and personal loans for over 10 years.