What should I do first, pay off my $16,000 car loan that has a 4.5% interest rate, or pay off my $2,600 student loan that has a 6.5% interest rate?

If you are interested in keeping the most money possible in your pocket, then you will want to first pay the minimum on all loans to avoid late fees, and then pay down the loan with the highest interest rate first. Once it is paid off, then move to the loan with the next-lowest interest rate and pay that off, etc. This assumes your loans do not have any pre-payment penalties. In your case, you'll want to pay down the student loan first, and then the car loan. Once you have paid down all of your loans, a prudent financial move would be to continue to deposit the amount you have been paying on the loans into a savings account each month, and then use that money for future auto purchases so you do not need to finance them.

There are different strategies people take when deciding how to optimize their debt repayment strategy. Some argue that you should always put more money towards the highest interest rate debt. This is basic math and aims to save you the most amount of money over the long term. There is another line of thinking that suggests you should consider paying off the smaller outstanding debts first regardless of their interest rates. This is purely a psychological play. By resolving a small debt you get an emotional win. You can then focus on paying off the next bigger outstanding debt. In your case, it's an obvious decision to put your focus on paying off the $2,600 higher interest rate loan. You'll benefit from both lines of thinking outlined above. Of course you definitely need to make sure you're paying at least your minimums on the car loan. A third option is to seek out a debt consolidation loan. Given that your car loan is a secured debt, it's likely that you'll be able to qualify for a consolidation loan which combines your debts into one, more manageable debt. Current rates at local credit unions are very low. It's likely you can refinance these debts into a loan at the 2-3% range. You can learn more about http://www.supermoney.com/help-with-debt/debt-consolidation/ on the SuperMoney site.

Student loans follow you around for the rest of your life (you can't dodge them through bankruptcy protection), so given the higher interest rate and smaller size of the debt, I'd pay off that student loan.Dave Ramsey's "Snowball Effect" is mostly good advice, but for Pete's sake, put as much as you can toward the highest-interest loan first. Ramsey is an entertainer first, and a financial advisor only when it's absolutely necessary.

Consider this, say you have $500 extra cash. Since you are paying the minimum amount on both, there's no question of penalty. Now, if you pay 500 towards your car loan, you'll save 500x4.5% i.e. $22.5 in interest over the next 1 year. But if you pay the same 500 towards student loan, you'll save $32.5. So it's wiser to pay off the student loan first. Also, as someone already pointed out, since it's the smaller loan, by prepaying you can get rid of a psychological burden of carrying two separate debts.