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Which Loans Should You Pay Off First? Highest Interest or Lowest Balance

Most people reading this site know that I am a big fan of Dave Ramsey. In fact, his debt snowball technique was instrumental in my family and I paying off a tremendous amount of debt a few years ago.

While the debt snowball technique has proven effective for literally millions of people around the world, many “scholarly” financial advisors still criticize the debt snowball method.

The debt snowball technique advises people to list their debts according to the outstanding balances and pay them off from the lowest balance to the highest balance without regard to interest rates.

According to Dave Ramsey, this technique allows people to pay off a few loans quickly which builds momentum to attack the larger bills.  

“If it were all about math, we wouldn’t have gotten ourselves into debt to begin with”, says Dave.

Dave Ramsey’s critics argue that paying off the debt with the highest interest rate first is better because it reduces the amount of interest you pay in the long run.

Should you pay off the loan with the higher interest rate or lowest balance first?

After successfully following Dave Ramsey’s Plan for debt reduction I found that a modified version of his plan worked best for us.

Initially, my family and I found the paying off the loans with the smallest balances first was highly effective in providing the motivation we needed to continue paying off our remaining debt.

We successfully paid off 5 or 6 accounts between $300 and $1500 leaving us with one larger credit card balance at 0% interest, an auto loan at 6%, and a student loan bill at 4%.

How Was Dave Ramsey’s Snowball Method Working for Us?

As time went on, and we were confident that our spending behavior had changed and we could start to take advantage of the mathematical benefits of attacking the higher interest loans.

Following Dave’s Plan, the next loan to attack in our debt snowball was the credit card. After crunching some numbers, we figured we could save ourselves over $50 a month in interest if we focused all of our available resources on the auto loan first.

Even though this was contrary to Dave Ramsey’s plan we were convinced it was the right thing to do for our particular situation.

If you are deciding if the “snowball” plan is right for you, I would suggest doing as we did. Pay off a few of your smaller balances first. If you feel strongly that you can continue paying off your remaing loans regardless of how long it takes, save money and focus your “snowball” debt reduction payment on your debt with the highest interest rate!

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