Is It Best to Pay Multiple Loans All at Once or One at a Time?

If you're responsibly managing your credit, it's a given you'll make all scheduled payment amounts on time. If you can budget payments beyond the minimum scheduled amount, you may save interest charges by contributing excess amounts to loans. Determining which repayment strategy, such as devoting all your funds to paying down one balance or tackling all loans at once, is essential for maximizing the benefits in your repayment plan.

Basic Loan Repayment Strategy

Although it may be tempting to seek a moral victory and pay off your loan with the smallest balance, sound financial planning isn't about moral victories, but about saving money. Because of this, debtors may want to devote all excess funds to paying off the loan with the highest interest rate, not the highest or smallest balance to reduce interest charges. For example, you have three loan balances, one for $1,200 at 6 percent, $4,000 at 9 percent and $12,000 at 10 percent. You plan to contribute $1,000 extra toward loan balances this year. Contributing an additional $1,000 to the 6 percent loan will save you $60 in interest in a year, as opposed to saving you $100 in interest with the 10-percent loan during the same time frame.

Consolidation Loans

Instead of managing multiple loans, some borrowers turn to debt consolidation to help effectively manage their debt. Particularly suited for loans with variable interest rates, such as cash advances from credit card companies or student loans, consolidation combines all loan balances into a single monthly payment. Suitable only when the consolidation loan locks permanent interest rates that are lower than rates for all loans. This allows a borrower's contributions to essentially contribute to all the original loan balances equally.

Freeing Up Credit

In some circumstances, borrowers may wish to close a line of credit quickly. Whether it's to demonstrate the ability to repay a loan to future creditors or as a means to free up credit for a larger loan -- or simply to make credit available in the future -- concentrating on paying down a single loan with a small balance may be a strategy a handful of lenders may consider. This strategy isn't without its costs, and borrowers who employ it will end up paying more in interest charges by not focusing on loans with the highest rate.

Investment vs. Repayment

It's highly unlikely, but in some instances, such as when carrying subsidized loans with minimal interest rates, using excess funds as an investment may be more profitable than contributing to a loan's balance. Investing $1,000 in a plan that yields an 8-percent return provides $80 in profit over the course of a year, while the same amount applied to a loan with 6 percent interest saves $60 in interest charges; the 8-percent investment yields $20 in profits after the loan's interest charges are deducted from its return.