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Which Debt is Next?
This is simultaneously one of the best and one of the most difficult parts of the debt payoff journey. Once you get to cross a debt off the list, it’s not always obvious which debt is next. This has been the topic of discussion in my house for the past few days since we paid off Car Loan #1.
In the beginning, it was pretty straightforward. We listed all of our debts out from highest interest rate to lowest. The only outlier was a family loan that we paid off first. After that, we went down the line, crossing them off as we went.
Now things are a little trickier. We have three non-mortgage debts remaining: Car Loan #2, My Student Loan and Cory’s Student Loan. My student loan has the highest interest rate, but we can write off the interest on our taxes and, if we ever needed to, we could put it into deferment. Cory’s student loan is the largest debt we have, starting off at over $92,000. It accounts for over 62% of our remaining debt. We would love to eliminate it, but it’s going to take years of hard work.
Which leaves Car Loan #2. It has the lowest remaining interest rate (5.64%), but the monthly payment is nearly $500. It also has the lowest balance, sitting at just over $20,500.
We briefly considered attacking the second mortgage next, but decided to wipe out the car loan as it is half the size of the second mortgage and has over twice the monthly payment. This will free up our cash flow and make a big difference in our debt snowball.
So look out, Car Loan #2, we have you in our sights!
October 30th, 2009 at 11:20 pm
I understand. When my husband and I were looking at our debts, we almost paid the car loan off first, even though it didn’t have the highest interest rate, because the monthly payment is equivalent to all of the minimum payments on our credit cards combined!
November 1st, 2009 at 3:01 pm
It’s great that you paid off your car loan!
November 3rd, 2009 at 4:41 pm
Good choice!
Congrats on paying Car Loan #1
I usually look at the size of the payment, and the interest rate.. if they’re basically the same amounts, then I wipe out the one with the higher interest rate
Whatever frees up more cash to put towards other loans, is always the better choice.
November 4th, 2009 at 3:05 am
a.b. - Car loans really add up!
Frugal Liz - Thanks!!
FB - I agree, I think as long as we keep going the order isn’t so important. The total keeps going down, so that’s the most important part.
April 2nd, 2010 at 9:52 pm
Found your blog and was wondering in the midst of your debt pay-offs if you have hear of Dave Ramsey? Google “Dave Ramsey” or “Total Money Makeover” We have paid off well in excess of 80K using his methods. List debts from the smallest AMOUNT to the largest. Smallest gets tackled first, largest last. That way you see yourself getting a grip. In the budget you snowball the payments into the next biggest. I did not read your entire blog but wanted to make that suggestion to help! Life like no-one else so later you can live like no-one else!