Debts Have an Order Too: Paying Off High-Interest Loans First — Your Debt Repayment Priority

When payday arrives, money flies out in every direction — credit card bills, overdraft accounts, student loans, car installments. So when a little spare cash comes in, the question of 'which debt should I pay off first' makes a surprisingly big difference. To get straight to the point: paying off the debt that reduces your interest the most for the same money — that is, the debt with the highest interest rate — is mathematically the most advantageous. This article works through why, using real numbers, and is a reference that also covers the exceptions (it is not a recommendation of any specific product).

Why the benchmark is the 'interest rate,' not the 'amount'

Many people try to pay off the debt with the largest balance first. But what determines how fast a debt grows is not the balance — it's the interest rate. For example, a 10 million KRW loan at 4% per year means 400,000 KRW in annual interest, but a 3 million KRW card loan at 18% per year means 540,000 KRW in annual interest. The balance is only a third the size, yet the interest is actually higher. If you have 3 million KRW to spare, wiping out the card loan first to save 540,000 KRW per year is far more beneficial than paying down part of the 4% loan to save 120,000 KRW.

Avalanche vs. Snowball: two strategies

There are broadly two approaches to debt repayment. The 'avalanche' method pays off the debt with the highest interest rate first to minimize total interest; if you look purely at the money, this method is always more advantageous. The 'snowball' method, on the other hand, pays off the debt with the smallest balance first — a psychological strategy that keeps you motivated through the sense of accomplishment of having 'completely wiped out one debt.'

• Avalanche: high-rate → low-rate order. Lowest total interest, so it's optimal 'on a money basis.' Especially effective when you have several debts at 15–20% per year, like card loans or cash advances.
• Snowball: small-amount → large-amount order. The number of debts shrinks quickly, so it suits people whose willpower tends to weaken. The downside is total interest may end up higher than with the avalanche method.
• Common principle: whatever the strategy, you must always pay every loan's 'minimum payment (to avoid delinquency)' first, then pour any remaining money into the No. 1 priority debt.

5 steps to set your debt priorities

1. Write down every loan you have on a single line: organize the balance, annual interest rate, and monthly minimum payment into a table.
2. Line up each debt's interest rate from highest to lowest (e.g., card loan 18% → overdraft 7% → credit loan 5.5% → student loan 2%).
3. Pay every debt's 'minimum payment' each month without fail — delinquency is the most expensive cost, bringing late-payment interest and a drop in your credit score.
4. Then put all your remaining spare cash toward extra repayment of the No. 1 (highest-rate) debt.
5. Once the No. 1 debt is fully paid off, roll the money you were putting into it into the next-priority debt as well (this is the 'snowball effect').

The difference in numbers: same money, different result

Say you have two debts. A is a card loan of 4 million KRW (18% per year), and B is a credit loan of 6 million KRW (5% per year). If you can repay an extra 500,000 KRW per month beyond the minimum payments, the interest saved over a year differs greatly depending on whether you put that 500,000 KRW toward A (18%) or B (5%). Paying off 500,000 KRW of the 18% debt a year early saves about 90,000 KRW in interest, while doing so on the 5% debt saves about 25,000 KRW. The same 500,000 KRW, yet the savings differ by more than threefold. When this difference accumulates every month until all the debt disappears, the gap in total interest widens to hundreds of thousands — or even millions — of KRW.

Exception: when it isn't always high-interest first

Interest-rate priority is the rule, but reality has exceptions. First, a debt that is on the verge of delinquency or already delinquent takes top priority regardless of its interest rate. Delinquency rapidly lowers your credit score (NICE, KCB), and once your score drops, the interest rate on all your future loans rises, leading to even greater losses. Second, debts that have a guarantor, or debts where your assets could be seized upon delinquency, may reasonably be paid off ahead of schedule to protect your family and assets. Third, if your emergency fund is zero, rather than throwing everything at your debt, it's better to first secure an emergency fund covering 3–6 months of living expenses, to prevent the vicious cycle of taking out high-interest debt again when you're in a pinch.

Paying off debt is also a 'guaranteed-return investment'

Paying off an 18%-per-year card loan is the same as earning a guaranteed 18% per year with no taxes and no risk. No investment product can guarantee a risk-free return like that. That's why, in general, high-interest debt where 'loan interest rate > expected investment return' should be repaid before investing. Conversely, for ultra-low-interest debt like student loans at around 2–3% per year, it may be better to put that money into tax-advantaged accounts such as an ISA or pension savings and run it over the long term — so judgments differ from person to person.

A high-interest debt is the most expensive debt. Putting out the most expensive one first is the cheapest way to buy.

To sum up, the basic formula is: pay every debt's minimum payment without skipping, but channel any remaining money into the debt with the highest interest rate. Add delinquency prevention, securing an emergency fund, and considering refinancing, and it becomes even more solid. Start by simply writing out the loans you have today on a single line, ordered from highest interest rate to lowest. That one sheet can dramatically change the interest you'll pay over the coming years. (This article is for general informational purposes and is reference material that may vary depending on individual circumstances.)