Consumers often make suboptimal loan prepayment choices

Consumers often make suboptimal loan prepayment choices Gaby Clark Scientific Editor Andrew Zinin Lead Editor 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. "This is because debt amortization (i.e., repayment) schedules often result in reduced interest payments when newer installment debts are paid first," she explains. Despite the potential savings, many borrowers do not take the time to analyze whether a different repayment order would be more advantageous. "It is fairly simple to run the numbers and see what the best financial choice is," Johnson says. "However, it can feel counterintuitive to allocate funds to newer instead of older debt, even when it's financially optimal to do so." Johnson's interest in personal finance began before her academic career while working as a loan officer. She says the experience exposed her to consumers who frequently made decisions that were not in their financial best interest. "I saw consumers make financially suboptimal decisions all the time," Johnson recalls. "The desire to understand why these decisions were being made is what led me to pursue my Ph.D. in the first place and now informs my research interests around debt repayment." Based on the research, Johnson recommends that borrowers focus on interest savings rather than loan age when deciding where to direct extra payments. She also suggests reframing the decision by considering how much time remains on a loan rather than how long it has existed. In addition, Johnson encourages consumers to use financial planning tools, including apps and online banking platforms, that can estimate interest savings under different repayment scenarios. Publication details Alicia M. Johnson et al, First In, First Out? How Debt Age Affects Debt Prepayment Decisions, Journal of Marketing Research (2026). DOI: 10.1177/00222437261419746 Journal information: Journal of Marketing Research Provided by University of Massachusetts Amherst