Each month, I pay extra on my car loan (my only outstanding debt) and then pull up my new amortization schedule which Money automatically calculates for me. Seeing how paying an extra 85% of a payment now knocks off an entire payment plus a little extra is motivation for me.

I’m not sure if there is an easy way to do this in excel. But I know for me, getting to see how the extra payment now multiplies when I’m saving 8% interest on a loan that’s at least a decade long would be highly motivating. Even if I still had two smaller loans at lower interest.

The other thing Money does is when I put in a payment on my loan, it calculates how much is going to interest. Seeing the interest drop each month (as the balance on the loan gets lower) also brings me joy.

And there is no money like free money.

Why can’t life work out this simply all the time?

By the way, there’s another method of paying off debts – I read it in “Life or Debt” by Stacy Johnson. First you create a table or spreadsheet and list the current balance on all the debts. In the next column, put the minimum payment due each month. In the 3rd column, divide the current balance by the minimum payment. The lowest number goes to the highest place on the list, and is paid off first.

The idea is to focus on the debt with the fewest monthly payments left, according to the author, which means that it will be gone the quickest and the debtor will see the fastest results that way. I haven’t tested it but it sounds like an interesting theory.

Regardless, my point was that it is only the interest, not the full P&I payment, that is deductible.

The 40k loan @ 8% is likely at least a 20 year loan. Personally I would probably start with the 8 % loan and then funnel any additional funds (raises, “third-paychecks”, etc.) at the 3.75% loan.

So the most exciting result for this example is that adding that extra money the whole time changes it from a ten-year debt to a six-year debt, either way you go. Paying off extra money to any of the debts is much more important than which debt he’s paying it to.

So maybe other issues are more important. For example, with the snowball method, he has one or two loans most of the time and with the high-interest-first method, he has three loans most of the time. That means he’s got more opportunities to forget to make the payment on time, to run out of stamps, to keep the automated payments going properly, etc. If this is ever an issue, or if one of the smaller loans is from a company that causes headaches, it’s worth looking into debt snowball.

If he gets a psychological thrill from having some of the loans paid off, he should go with the debt snowball.

I don’t know which looks better on your credit record: having some loans paid off, or having more long-standing loans with perfect payment records?

Another thing to keep in mind is that he says “pay off as much as I can the next couple years.” If after two years he switches to paying only the minimum on everything, then with the debt snowball method, he’ll be paying for the two most expensive loans ($607.43 total) until about month #73, then $485.31 for the rest of the ten years. With the highest-interest-first method, he’d be paying on all three loans ($657.46) until about month #90, and then just paying on the two smaller loans ($172.15) for the rest of the ten years.

If he’s thinking of switching to paying only minimums later, I’d split the extra across all of them now so that they could all be paid off in less than ten years.

Three and a half years into paying off these debts, something happens and the writer has to use his emergency fund.

Lowest first: The writer has an extra $493.86 that he can use to rebuild his emergency fund. A $1000 would only take 2 months to rebuild. Also, if the emergency were big enough to take out a short term loan to cover, that extra money could pay off that small loan very quickly.

Highest rate first: The writer has 321.71 to rebuild that emergency fund. It takes a little over 3 months to again reach 1000 dollars. A small loan could still be quickly paid off, but not as quick.
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Paying off the smaller loans first costs you $900 over 5 years. But it not only gives you some psychological victories along the way, it gives you a little more cushion should a big emergency arise.

I would almost always be in favor of paying off the smaller loan first. Even in this extreme example, it costs very little to pay off the smaller loans first.

If you had below-average loans, you probably only saw 10-year loans, but if you had a loan-heavy year, then you might be talking about longer terms. As for consolidation, that is a whole other ballgame.

Student loan INTEREST payments are tax deductible, not the full payment. This is deductible even for those that take the standard decudtion, itemizing is not necessary for this.