When consumers pay down debt, many choose to put funds toward their oldest loans first—even when doing so may not make the most financial sense, according to recent research by Alicia M. Johnson, assistant professor of marketing at the Isenberg School of Management.
In a paper published in the Journal of Marketing Research, Johnson and her co-authors examined how consumers decide which installment loans to prepay when they have additional funds available. Their research found that borrowers often focus on older debts because they feel they have already invested significant effort and energy into paying them down.
"In our studies, we find that consumers prioritize older debt prepayment because they feel they have invested greater effort—including mental or physical work and energy—to repay it," Johnson says.
The study comes as installment loans, including personal loans and buy now, pay later plans, have become increasingly common tools for covering expenses. Unlike revolving debt such as credit cards, installment loans have fixed repayment schedules with defined start and end dates.
Johnson says consumers should generally evaluate factors such as interest rates, monthly payments and loan terms when deciding where to direct extra payments. In many cases, however, paying down newer loans first can produce greater financial benefits.
