There Is an Order to Paying Off Debt: Prioritizing High-Interest Loans First

When payday arrives, money may go out in several directions at once: credit card bills, overdraft accounts, student loans, and car installments. When you have a little extra cash, deciding which debt to repay first can make a surprisingly big difference. In short, the mathematically most advantageous choice is to repay the debt that reduces the most interest for the same amount of money, meaning the debt with the highest interest rate. This article explains why using real numbers and also covers exceptions for reference purposes only; it is not a recommendation for any specific product.

Why use the interest rate, not the balance, as the standard?

Many people try to repay the debt with the largest balance first. But what determines how fast debt grows is not the balance, but the interest rate. For example, if a loan with a balance of 10 million won has an annual rate of 4%, the one-year interest is 400,000 won. But if a card loan with a balance of 3 million won has an annual rate of 18%, the one-year interest is 540,000 won. The balance is about one-third as large, yet the interest is actually higher. If you have 3 million won in extra cash, eliminating the card loan first and saving 540,000 won a year is far better than using it to partially repay a 4% loan and saving 120,000 won.

Avalanche vs. snowball: two strategies

There are two main approaches to debt repayment. The avalanche method repays the debt with the highest interest rate first to minimize total interest, and if you look purely at money, this method is always more advantageous. By contrast, the snowball method repays the debt with the smallest balance first and uses the sense of achievement from completely eliminating one debt as a psychological strategy to stay motivated.

• Avalanche: from high interest to low interest. It results in the lowest total interest and is optimal in financial terms. It is especially effective when you have several debts at 15-20% per year, such as card loans or cash advances.
• Snowball: from small balances to large balances. It is suitable for people whose motivation may weaken easily because the number of debts falls quickly. However, total interest may be higher than with the avalanche method.
• Common rule: whichever strategy you use, pay the minimum payment on every loan first whenever possible to prevent delinquency, then put the remaining money toward the top-priority debt.

Five steps to set your debt repayment priority

1. Write down every loan you have on one line: organize the balance, annual interest rate, and monthly minimum payment in a table.
2. Rank each debt from highest to lowest interest rate, for example card loan 18% → overdraft account 7% → personal loan 5.5% → student loan 2%.
3. Pay the minimum payment on every debt every month without fail — delinquency interest and a lower credit score are the most expensive costs.
4. Put all remaining extra cash toward additional repayment of the first-priority debt, meaning the highest-interest debt.
5. Once the first-priority debt is fully repaid, roll the money you were putting into that debt into the next priority. This is the snowball effect.

The difference in numbers: same money, different result

Suppose you have two debts. A is a 4 million won card loan at 18% per year, and B is a 6 million won personal loan at 5% per year. If you can repay an extra 500,000 won each month in addition to the minimum payments, the interest saved over one year differs greatly depending on whether that 500,000 won goes to A at 18% or B at 5%. Repaying 500,000 won of 18% debt one year earlier saves about 90,000 won in interest, while doing the same for 5% debt saves about 25,000 won. It is the same 500,000 won, but the savings differ by more than three times. If this difference accumulates every month until all debt is gone, the total interest gap can reach hundreds of thousands to millions of won.

Exceptions: when high interest may not always come first

Prioritizing the interest rate is the general rule, but real life has exceptions. First, debt that is close to delinquency or already delinquent should come first regardless of the interest rate. Delinquency can quickly lower your credit score, such as NICE or KCB, and once your score falls, all future borrowing rates may rise, causing bigger losses. Second, it may be reasonable to repay debt tied to a guarantor or debt that could lead to asset seizure if delinquent earlier in order to protect your family and assets. Third, if you have 0 won in emergency savings, it is better to first secure 3-6 months of living expenses instead of putting every spare won into debt repayment, so you can avoid the cycle of taking on high-interest debt again in an emergency.

Repaying debt is also a reliable way to reduce interest

Repaying an 18% annual card loan is like earning a guaranteed 18% return with no tax and no risk. No investment product can guarantee a risk-free return like that. That is why, in general, high-interest debt where the loan interest rate is higher than the expected investment return should be repaid before investing. On the other hand, for ultra-low-interest debt in the 2-3% annual range, such as some student loans, it may be better to put that money into tax-advantaged accounts such as an ISA or pension savings account for long-term management, so the decision can vary by person.

To sum up, the basic formula is to pay the minimum payment on every debt without missing it, then direct any remaining money toward the debt with the highest interest rate. Adding delinquency prevention, emergency savings, and refinancing review makes the plan stronger. Start today by writing down your loans in one line from highest to lowest interest rate. That single table can significantly change how much interest you pay over the next few years. This article is for general informational purposes and may vary depending on individual circumstances.