Which Debts Should You Pay Off First?

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Debts can start weighing down on you after a period of time, causing immense anxiety and stress as well as affecting your financial status. If you have to pay off a certain amount of debt, it is a good idea to make a balanced plan to approach the pay off. If you debt repayment is haphazard and erratic, it will simply cause more mental and financial strain on you.

There is not set method according to which you should be repaying your debts, since it would largely depend on the source and kind of income as well as factors such as spending capacity. However, it is important to plan your payoff since the sooner you repay your debts, the better your finances will be. Here are some factors that you can take into consideration while repaying your debts, but first, it is important to see whether you should pay your smallest debts first or your high-interest debts first.

High-interest debts.

A lot of people consider that paying off the high-interest debts first is a better choice, since the more you delay, the more interest you have to pay, so essentially if you pay them off faster, you will save more money. The interest saved can be used to pay off the other debts.

This explanation is fairly logical; however, it may feel like you are not progressing anywhere with your debt repayment since high-interest debts are usually much larger and take very long to be paid off.

Smaller low-interest debts.

Some people think that paying off these debts faster can help you reduce the total debt you are under in a much faster way. You will be thinking that you are making considerable progress into going debt-free, once your smaller debts are paid off, and you can focus on the larger ones.

The only problem with this method is, if you also have a high-interest debt with this, then you would have to pay a larger interest amount on that for much longer.

The factors to take into account while deciding which method to follow can be:

  1. Your spending habits.

This directly correlates with the amount of money you will be able to save, and since you will be paying your debt out of your savings, it is very important to consider spending habits. If you have a lot of debt to pay off, it is advised to keep your credit card spending to a minimum, since you do not want to overspend and pay for your outstanding credit later on as well.

  • Tax breaks.

Tax breaks are available on low-interest loans, such as student debts, which provide a certain tax break on the amount on interest paid. These should definitely be taken into consideration when you are paying off your student loans and credit card debts, in particular.

  • The urgency of your debt.

This should always be taken into consideration when paying off debts. If you have a good number of years on your debt, you can rest assured that your monthly instalments will cover you. However, if you have payday loans, you should absolutely try to cover those first before moving on to the others.

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