Over the weekend, I decided to use $2,000 of the money I made from freelance web consulting last year to speed up paying off my car loan. Even though my car loan has a lower interest rate (2%) than my some of student loans (~4%), it’s more important for me to reduce the car loan. It’s not a logical choice, as keeping the money in savings was generating interest of about 4%, but some debt is more important than other debt or savings for non-financial reasons.
While financial calculators often suggest the “snowball” method for paying down debt, it’s not a one-size-fits-all solution. If all things are equal — for example, all of your debt is from financial institutions like credit card companies, pay down that most expensive debt (highest interest rate) first while making the minimum payments on the others. All things are rarely equal.
Updated September 28, 2007 and originally published January 23, 2006. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.