On Monday's Marketplace radio show, behavioral economist Dan Ariely examined how we repay loans.
If you have several loans, which one should you pay off first? The largest, the smallest, or the one with the highest interest rate?
The Marketplace segment suggests knocking out the loan with the highest interest rate first. In a perfect and rational world with unlimited cash flow, this is the correct answer: you'll minimize the total amount of interest paid over your lifetime.
However, commenters were quick to note that there are other real-world situations where it makes sense to pay another loan first. For example, your minimum monthly payments (or fixed amortizing payments) may make it impossible to attack the high-interest loan first. Others argue that the psychological benefit of eliminating loans from small to large is satisfying and motivating.
The "right" answer depends on your situation. However, many never consider which loans to pay off first.
If you have several loans outstanding and you want to get rid of them, put some thought into the process. Consider your cash flow, risk, peace of mind, and total interest costs. Then decide what's best.