Which debt is best to pay off first?

Can you make all your agreed payments and have money left over? Then, under equal conditions, you save the most interest by making extra repayments on the debt with the highest interest rate. Do you want to cross off a loan from your overview sooner? Then you can start with the smallest debt.

This is about your extra money. You continue to pay the regular installments on your other loans.

First check: are there payment problems?

Are you behind on rent, energy, or other bills? Or can you not pay an agreed installment? Then look at that situation first. The consequences of a missed payment can be more important than the interest difference between loans.

Contact the relevant organisation and ask for help from Geldfit or your municipality. The comparison below is about loans for which you can continue to make the agreed payments.

Method 1. The highest interest first

List your loans in order of interest rate, from high to low. Pay the agreed installment on all loans and put your extra amount towards the loan with the highest percentage.

Why? An extra euro of repayment prevents more interest per period at a higher interest rate. MoneyHelper explains this principle.

This is also called the avalanche method. The interest advantage applies with an equal total payment budget, fixed interest rates, and without deviating costs or restrictions. If those conditions change, you must compare again.

Method 2. The smallest debt first

List your loans in order of outstanding amount, from small to large. Your extra money goes to the smallest debt.

Once this is paid off, you use the freed-up monthly amount for the next debt. This is called the snowball method. A completed loan can be a visible milestone that helps you to keep going.

On the other hand, a loan with high interest may remain active for longer. As a result, you may pay more interest than if you start with the highest interest.

Example: three loans

Together you pay €330 per month and have €100 extra available.

With highest interest first, that extra €100 goes to loan B. You then pay €50 on A, €200 on B, and €180 on C. The order is B, C, A.

With smallest debt first, that extra €100 goes to loan A. You then pay €150 on A, €100 on B, and €180 on C. The order is A, B, C.

In both cases, you pay a total of €430 per month. Only the distribution differs. The example shows the starting distribution; it does not predict an end date.

Is the largest debt not the most important?

A large loan can cost the most euros in interest per month. Yet it doesn't have to be the best place for extra repayment.

In the example, loan C costs approximately €560 in interest per year if the debt were to remain the same for a whole year. Loan B would then cost €360. But repaying an extra €100 on B prevents €12 in interest on an annual basis, compared to €7 on C, as long as that €100 would otherwise have remained outstanding all year. In a real repayment plan, the amounts change monthly.

So compare the interest rate for the effect of your extra repayment, not just the total interest amount.

Can you change methods later?

Yes. You can complete a small debt first and then choose the highest interest. Then recalculate what that does to your costs and end date. Switching does not automatically make a plan more beneficial, but a plan must also remain feasible.

What do you do when a loan is finished?

Decide if you can continue to use the freed-up monthly amount. Continuing is possible with both methods. You therefore don't always have to start with the smallest debt.

Read how you continue with freed-up monthly amounts or go back to the complete step-by-step plan.