I might have missed it. I haven't read all of the replies. The question you should ask first is, "Do I have enough cash to cover 6 months living expenses?" Or whatever YOUR cash reserve goal is. If you do have enough cash, then pay highest interest rate loans off first until you've repaid all loans -- including even those low-rate car loans. I tend to lean a bit toward "If you can invest the extra money and make an after-tax return greater than what you're paying on the auto loan, make the investment." However, this doesn't work if you have to take some degree of risk to get the after tax return you need. (The financial gurus say the only 2 riskless investments are CD's and US government 'debt' like a Savings Bond (haven't heard about anyone buying one of those in years). Finally, I also tend to think total real dollar cost. Over a year, a 9/10's of 1 percent $20,000 loan will incur $180 in interest. Now, let's see, that new drill I've been wanting costs $150. So -- I tell myself -- I can buy the drill if I'm NOT paying interest.
I don't know that this is the best place to say this....but another way I think about debt is "How do I benefit if I pay more on a loan than I need to?" Here's the key -- a lot of people don't think about it this way so sometimes it's hard to grasp -- the next EXTRA dollar you pay will go to reduce principal -- and it's effectively reducing the principal for the entire term of the loan. Examples: Home loan -- assume $200,000 30 year loan. Payment is $954.83. Total interest over the lifetime: $143,739. NOW, if you just paid $100 extra principal in the first month of the loan and never again paid anything except the regular payment of $954.83, the toal interest drops to $143,509....an interest savings of $230 over the life of the loan. Put another way, the last payment on this loan is $625.10 rather than $954.83. So, on longer term, larger loans, it's best to make extra principal payments as early and as large as you can. Hope some of this helps.
