Loan Payoff Efficiency

[Zachary C.]

So, let’s say I am considering the topic and idea of the prioritization of paying off loans.

To me, it only makes sense to consider the principle of the question for the initial prioritized list. I believe that consideration of individual circumstances could undoubtedly sway the order of the list. However, those should be regarded as secondary and only applied once a properly ordered list has been established based on the principle of efficiency.

The idea of efficiency, as I mean it here, is given a scenario with more than one debt, which should be the logical choice to focus on and pay off first? Secondary factors like how much I have available to pay down with (now or via monthly budget) or the opportunity cost (investments that could be made instead) must be eliminated so that only the efficiencies/deficiencies involved in the loans and their order of early payment are considered. There are too many possible scenarios that could be created with secondary factors which is why I think they should be considered after making a logical list; so that pros and cons of changing the order could be properly weighed. I hope this is a fairly logical approach to take as real life can change factors randomly and we must ultimately cope with that as required.

So, we must break down a scenario with only the essentials on the table:

We have some undefined amount that can be applied to one loan at a time (for the sake of focusing on the efficiency principle).

In addition to being an undefined amount it can also fluctuate in unknown amounts and directions (keeping real life involved).

All loans are assumed to be fixed rate and amortized.

All the loans are at different points in their life cycle of pay down.

The loans could have had the same, different, or mixed original amortization periods.

We will have 4 loans to prioritize (listed in no particular order) so we can work off the same example:

A) Remaining principle $94,925, Interest rate 3.75%, Monthly payment $710

B) Remaining principle $54,814, Interest rate 5.50%, Monthly payment $388

C) Remaining principle $12,741, Interest rate 3.90%, Monthly payment $532

D) Remaining principle $41,495, Interest rate 5.25%, Monthly payment $355

Given the above information:

Is there some fundamental flaw in looking at the question in this manner?

If so, what is it?

Is there enough information to make an informed decision regarding the question?

If not, what information would you still require to do so?

If so, how do you prioritize your list for efficiency AND how did you come to that conclusion?