Debt Repayment Strategies

When aiming to minimize the total interest paid and pay off your debts efficiently, it's generally best to prioritize debts with the highest interest rates, regardless of their balances. This strategy is known as the debt avalanche method. By focusing on high-interest debts first, you reduce the amount of interest that accrues over time, leading to faster overall debt repayment.

However, when multiple debts have the same high interest rate, paying off the one with the larger balance first can be more cost-effective. Here's why:

• Interest Accrual: Interest is calculated based on the outstanding balance. A larger balance at a high interest rate will accrue more interest over time compared to a smaller balance at the same rate.
• Total Interest Paid: Reducing the principal on the larger debt decreases the amount of interest you'll pay in the long run.

Example:

• Debt A: $1,000 balance at 20% interest.
• Debt B: $10,000 balance at 20% interest.

If you have an extra $1,000 to put toward your debts, applying it to Debt B (the larger balance) will save you more in interest over time than paying off Debt A in full.

Conclusion:

• Most Efficient Approach: Pay off debts with the highest interest rates and largest balances first to minimize total interest paid.
• Alternative Strategies: Some people prefer the debt snowball method, paying off smaller balances first for psychological satisfaction. While this can boost motivation, it may result in paying more interest over time.

Recommendation:

• Assess All Debts: List your debts with their interest rates and balances.
• Prioritize by Interest Rate: Focus on debts with the highest rates.
• Consider Balance Size: If interest rates are equal, target the debt with the larger balance.

By following this strategy, you'll efficiently reduce your overall debt burden and save money on interest payments.

*Therefore, to minimize total interest paid, it is more efficient to pay off high-interest debts with larger balances first, rather than focusing on low-balance high-interest debts.