Recent research in the American Marketing Association’s Journal of Marketing Research indicates that consumers tend to pay off their smaller debts first, even though they would save more money on interest by paying off larger, higher interest-rate loans, according to a statement.
The authors of the research have stated that providing a better framework for interpreting the decisions of debtors can help lenders to develop new methods that would help consumers pay off debt faster. The writing, titled “Winning the Battle but Losing the War: The Psychology of Debt Management,” had individuals participate in debt management games to provide the researchers with more insight into how consumers perceive debt management.
The study found that consumers generally want to reduce the number of loans outstanding, which leads to either consolidating or paying off the smaller balances first. The research indicated that consumers believe that smaller debts are easier to manage. Paying off the smaller debts makes them feel like they are making progress, when focusing on paying off fractions of debts with higher interest would cost them less in the long run.