Personal Finance FAQ Series: Should I Pay the Small Low Interest Loan Off Before the Big High Interest Loan

You have several credit cards. A couple of them have a small balance and a low interest rate. Some of them have a high interest rate and a big balance.

Which one should you pay off first?

Watch the video below and find out, and while you’re at it, you can get my 52 week Financial Game Plan by filling out the box right beneath this.

Should I Pay the Small Low Interest Loan Off Before the Big High Interest Loan?

The transcript for this video follows below.

This is a common question that people have. My answer depends on your previous behavior.

If you’re someone who has been making progress of paying down your debts, then the answer is pay off the high interest loan first. Since you’ve shown the discipline necessary to make progress against your debts, then you should go with the financially correct answer. Paying down your debts is already a part of your muscle memory, so apply those muscles against the highest interest loan.

On the other hand, if you’re just starting to pay off debt or you’ve historically had trouble paying down debts, you need to focus on your psychology first. You want to get a quick win and get a reward of a zero balance statement to reinforce the success of what you’re doing. Otherwise, Monkey Brain is going to tell you that you’re failing and to just go back to doing the same old thing that you’ve been doing. You need to beat your Monkey Brain first and get a win under your belt so that you develop discipline and good habits before you start tackling the bigger debts.

The most important thing, though, is to pay off something. Paying off the big one or the little one is way better than paying neither one off.

What questions would you like to see me answer? Leave me a comment and let me know!

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Jason Hull was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business. He held a CFP certification from 2015 - 2021. You can read more about him in the About Page. If you live in Johnson County, Texas or the surrounding areas, he and his wife are cash buyers of Johnson County, Texas houses.

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