Imagine you’ve been chipping away at a student loan for eight years and a car loan for two. A tax refund lands in your bank account, and you decide to put it toward one of them. Which do you pick?
For most people, the answer feels obvious: knock down the older debt. It’s the one you’ve been living with longest, the one that feels most overdue for retirement. But that instinct, according to new research published in the Journal of Marketing Research, often steers borrowers into a financially worse outcome than they would get by prepaying the newer loan instead.
A question about how borrowers juggle multiple loans
U.S. household debt recently topped $18.2 trillion, and roughly 29% of American households carry two or more installment loans at the same time, according to Federal Reserve data cited in the paper. Installment loans, such as mortgages, auto loans, student loans, and the increasingly popular “buy now, pay later” plans, have a fixed repayment schedule, a set interest rate, and a defined end date. Because people take on these loans at different points in life, it’s common to hold debts that are years apart in age.
That’s the starting point for Alicia M. Johnson of the University of Massachusetts Amherst and her co-authors at the University of Arkansas, the University of Georgia, Seattle University, and Virginia Tech. They wanted to know whether the age of a loan, meaning how long ago it was taken out, shapes how consumers decide which debt to pay down early, and whether that preference serves borrowers well.
The math of amortization
To understand why loan age matters financially, it helps to know how amortization works. When you take out an installment loan, each monthly payment is split between interest and principal. Early in the loan’s life, a big chunk of every payment goes to interest because the outstanding balance is still large. As the balance shrinks, the interest portion shrinks too.
This means a principal-only prepayment made early in a loan’s life tends to save more total interest than the same prepayment applied late. The authors walk through an example: a consumer with two identical $100,000 loans, one four years old and one eight years old, both at 12% interest. Throwing a $5,000 prepayment at the newer loan saves about $12,374 in interest and shaves roughly a year off the repayment term. Applying that same $5,000 to the older loan saves only about $6,067 and shortens the term by eight months. The newer loan is the better target by more than $6,000.
Of course, real-world loans differ on interest rates, balances, and remaining terms, and those variables can flip the optimal answer. But holding other factors equal, newer is often the financially smarter choice. The researchers wanted to see whether borrowers actually behave that way.
Testing the preference in eight studies
The team combined an analysis of real loan data with seven experiments. The real-world data came from Bondora, an Estonian peer-to-peer lending platform that makes its loan records public. After filtering for borrowers who had exactly two overlapping loans, the researchers ended up with 43,456 loans from 21,728 borrowers. Controlling for loan size, interest rate, term length, maturity date, and borrower characteristics, they found that older loans were significantly more likely to have been repaid than newer ones.
The experiments moved the question into controlled settings. In one study, 200 participants imagined they had two identical auto loans, one taken out five years earlier and one three years earlier, with the same interest rate, balance, monthly payment, and remaining term. Roughly 72% chose to apply a $1,000 windfall to the older loan. Another study replicated the pattern with “buy now, pay later” loans from the same lender, so participants couldn’t simply be favoring whichever institution they signed up with first.
A later experiment asked participants to imagine having two loans that differed on either interest rate or balance, with information about loan age either included or left out. When age was disclosed, participants shifted money toward the older loan even when doing so cost them more in interest. The researchers label this pattern a “first-in, first-out” or FIFO preference.
Why older debts feel heavier
The authors propose that the pull toward older debt comes from a sense of accumulated effort. Managing a loan means logging in, checking balances, submitting payments, and thinking about money month after month. The longer a loan has been on the books, the more of that mental and physical work a borrower has poured into it. That invested effort, the researchers argue, makes the older loan feel more deserving of resolution, a variation on the sunk cost effect documented across decades of behavioral research.
To test this explanation, the team ran a study with 298 participants who saw two identical student loans. When age information was shown, participants reported feeling they had invested significantly more effort into the older loan, and this perception statistically accounted for their stronger preference to prepay it. The researchers also ruled out two alternative explanations: that borrowers thought prepaying the older loan would close an account faster or help their credit score. Neither belief differed meaningfully between conditions.
In another experiment, the team manipulated effort directly. Participants were told that one of their two loans was on autopay while the other required manual payments. When the older loan was on autopay, reducing the effort associated with maintaining it, the preference to prepay it first shrank substantially. Notably, the FIFO preference showed up even when participants were told they had paid back more money on the newer loan, suggesting that invested effort, not cumulative dollars, was doing the work.
Interventions that narrow the gap
The researchers tested two ways to nudge borrowers toward better decisions. The first reframes how loan age is presented. Instead of telling participants a loan was “taken out ten years ago” (a “to-date” frame), researchers described it as having “five years remaining” (a “to-go” frame). Mathematically identical information, but the shift in focus, from effort already spent to effort still ahead, eliminated the preference for the older loan.
The second intervention gave participants a decision aid: a graph showing how total interest savings would change based on how they split a $2,500 bonus between two loans, with the optimal allocation labeled. In the no-information condition, 30% of participants directed more than half the money to the older, smaller-balance loan. When age was disclosed without the aid, that figure rose to 48%. With the savings graph, it dropped to 19%, though didn’t disappear entirely.
What it means for borrowers and lenders
For consumers, the practical takeaway is to run the numbers before committing a prepayment. The financially optimal target depends on interest rate, balance, and remaining term, and the loan that feels like it’s been hanging over you the longest may not be the one where an extra payment does the most good. Online amortization calculators and lender-provided interest-savings tools can help surface the tradeoff.
The authors note that for lenders, the implications cut both ways. A borrower’s preference for clearing out older loans means creditors of newer loans collect more of the interest they expected, while creditors of older loans give up future interest income in exchange for reduced risk. Whether that outcome is welcome depends on the lender’s portfolio and how creditworthy the borrower appears after taking on additional debt.
One caveat worth keeping in mind: in some situations, prepaying the older loan really is optimal, for instance when a newer loan carries a much lower interest rate or a shorter remaining term. The researchers caution that blindly shifting to a “newer first” rule could produce its own mistakes. The more general point is that debt age, on its own, carries emotional weight that can swamp the underlying math.
