Multiple Loans at Once: Which to Pay Off First

An extra payment is conveniently directed into the loan with the highest rate, while the rest keep being paid on schedule. That way the extra amount saves more on interest every month. If quick results matter more, there's a second order: from the smallest balance.

Let's go through both orders on an example with three loans, calculate how much an extra payment saves, and see what's worth checking in the contract before the first early payment. This is general material and doesn't replace financial advice: loan terms depend on the bank and the country.

In plain terms. Picture cleaning three rooms when you only have time for one. The look of the home changes the most where the mess is greatest. Loans are similar: the more noticeable effect comes from the one where the extra amount saves more on interest.

Two repayment orders

Both orders have names in debt management practice. They have one thing in common: the required payments go on all the loans, while the extra payment goes into one loan by the chosen rule. Once that loan is paid off, its payment joins the extra one and moves on to the next.

From the highest rate (the avalanche method)

The extra payment goes into the loan with the highest annual rate. This produces a smaller total of interest over the whole period, because the most expensive debt disappears first.

From the smallest balance (the snowball method)

The extra payment goes into the loan with the smallest balance. It closes quickly, and the number of monthly payments goes down. The amount of interest is usually higher, but the result shows up sooner, and that helps you stick with the chosen plan.

How much an extra payment saves

Picture Viktor. He runs a small workshop and has three loans. Each month's required payments consist of a principal part and interest on the balance. Additionally, Viktor can direct $400 a month.

Step one: write down each loan. Three numbers are needed for comparison: balance, rate, and required payment. They're in the table.

Interest for a month = Balance × Annual rate ÷ 12

Step two: calculate the first month's interest. Equipment: $6,000 × 0.18 ÷ 12 = $90. Working capital: $2,500 × 0.36 ÷ 12 = $75. Installments: $0. In total, $165. The equipment loan generates the most interest even though its rate is half as high: its balance is larger.

Monthly savings = Extra payment × Annual rate ÷ 12

Step three: calculate what the extra $400 gives. Into the working capital loan: $400 × 0.36 ÷ 12 = $12 a month. Into the equipment loan: $400 × 0.18 ÷ 12 = $6. Into the installment plan: $0. The difference between the first and second option is $6 a month, as long as the extra payment sits in that loan.

Step four: decide the order. By the avalanche method: working capital (36%), equipment (18%), installments (0%). By the snowball method: installments ($1,500), working capital ($2,500), equipment ($6,000).

Step five: check over the whole term. Let's count month by month: required payments go on all the loans, the extra payment by the chosen order, and a paid-off loan hands its payment to the next one. The result in the table below is rounded to tens.

Both orders shorten the term from 12 to 8 months. The difference in interest between them is about $120 in favor of the avalanche. In the example, that difference is small, because the loans are small. The larger the balances and the wider the gap between rates, the more noticeable the difference.

Why choose one order or the other? The avalanche is cheaper, the snowball reduces the number of payments and creditors faster. Which order to choose depends on what matters more to the business right now: a smaller amount of interest or fewer obligations. Both options work if you stick with the chosen order to the end.

What to check in the contract before the first early payment

The terms of early repayment are determined by the contract with the bank and your country's law. There are four things worth finding out in advance.

Early repayment terms. Some contracts have limits or a fee for an early payment. That determines whether an extra payment is worthwhile given the difference in interest.

What changes after the payment. A bank may shorten the term and leave the payment unchanged, or reduce the payment and leave the term. The procedure differs between banks, and it's convenient to ask before the payment.

Collateral. If a loan is secured by collateral or a guarantee, paying it off releases the security. Sometimes that matters more than the rate.

Required payments on the other loans. An extra payment doesn't replace the required ones. The remaining loans get paid on schedule until their turn comes.

Advice. It's convenient to direct into the extra payment only what's left after required payments and a reserve for daily needs. Then early payments don't create a shortfall in the next few days.

How this looks in your books

In BizFin, each loan is recorded as its own entry in the “Debts” section, on an account of the “Loans (loans, installments)” type. The entry stores the amount, rate, term, and payment schedule, and the “I Owe” card shows the balance across all active debts and loans together. Interest accrues on the remaining principal balance, and with a payment, interest is covered first, then the principal.

An extra payment is entered in the payment form: by default, it shows the entire balance, and for a partial payment you enter a smaller amount. After the payment, the schedule is recalculated for the new balance. The number of payments doesn't change, their amount decreases. So a bank's schedule after an early payment may look different, and it's worth reconciling with the bank.

Upcoming payments on all the loans are visible in the reminder calendar at the top of the page and in the “Scheduled Transactions” section with an “On schedule” label. In the “Profit and Loss” report, loan payments are shown in a separate list and don't reduce profit, while interest on debts sits in its own section. Interest on each loan is visible in the expanded row of the record.

Careful. The section has limits. After an extra payment, the amount of future payments decreases, while the number of payments stays the same. The rate is one for the whole term, late-payment penalties aren't calculated, and reminders aren't sent to your email or phone. There's no repayment-order hint in the “Debts” section: you choose the order yourself using the calculation from the article.

What's worth remembering

• Required payments stay on all the loans. The extra payment goes into one loan by the chosen order.

• The avalanche starts with the highest rate. It gives a smaller total of interest over the whole period.

• The snowball starts with the smallest balance. It reduces the number of payments faster.

• The savings can be calculated. The extra payment, multiplied by the rate and divided by 12, gives the first month's savings.

• Check the contract terms before paying. Early repayment, the method of recalculation, and collateral determine what exactly will change.

Frequently asked questions

What should you pay off first if you have several loans?

Usually the loan with the highest rate, because the extra payment saves more on interest there. If it matters more to quickly reduce the number of payments, pay off from the smallest balance. The remaining loans get paid on schedule.

How does the avalanche method differ from the snowball method?

The avalanche queues loans by rate from the highest, the snowball by balance from the smallest. The first order is cheaper on interest, the second closes individual loans faster.

How do you calculate how much an extra payment saves?

Multiply the extra payment by the loan's annual rate and divide by 12. For $400 at a rate of 36%, that's $12 a month, at a rate of 18% it's $6.

Do you need to keep paying on all the loans according to schedule?

Yes. The extra payment goes on top of the required ones and doesn't replace them. Once a loan is paid off, its payment joins the extra one.

What should you check before repaying early?

The early repayment terms in the contract, the method of recalculation (shortening the term or reducing the payment), the presence of collateral, and the effect of the payment on your reserve for daily needs.

How do you keep track of several loans?

Each loan as its own record with a rate and a payment schedule, with the balances across all loans visible in one place. Then you can choose the repayment order by the numbers.