Debt is a huge burden, and for the most part, it can’t be avoided if you borrow money to buy a house, a car or get an education. According to the Fed, the average American household is just shy of $131,000 in debt. Almost $16,000 of the debt is from credit cards – How do you compare to the average American? Did you overspend a little bit?
Pat yourself on the back if you’re below the average and don’t freak out if you’re above the average. You need to prioritize your loans and make a thoughtful plan which determines what loans to pay-off first and which ones to delay.
Steps to Determine Which Loans to Pay Off First
You need to buckle down and plan wisely to be able to make good use of your money by simply making one important decision – Which debts to pay off first. It might not be an easy decision and may require expert advice and thoughtful thinking but you don’t need to be a financial professional to figure out which debt you need to pay off first. If you don’t know which debts to pay off first then follow these simple steps and set your priorities:
- Which Kind of Loans You Need to Pay Off?
There are two types of debts: good debts and bad debts. As the name suggests good debts help raise your financial position while bad debts can deteriorate your position to some extent. Good debts include education loans or home loans that will help you become financially more stable in the near future. On the other hand, bad debts include credit card bills or personal bank loans that are not taken for any productive purposes. Even the best payday loans are bad debts and need to be paid off first because it helps free up extra cash. So while planning what debts to pay off first bad debts should be a priority.
- Smaller vs. Bigger Loans
Chances are you have a number of loans which large and small amounts. It’s difficult to repay a bigger loan like a mortgage at one time, but you can easily pay off a loan with a smaller balance. When you are able to repay a loan in its entirety, this removes a little burden from your shoulders. It also helps motivate you for the future when you need to repay bigger loans and inspires you to actually feel like you can do this. It’s like when you finish off smaller chores at home or work. Paying off smaller loans first will help spread positivity not only in your mind but also in your credit score.
- High Interest Loans Need to Go
Some debts are actually more expensive than others. This should be easy to calculate by taking into account the amount of interest you are paying on a loan. The loans with higher interest rates take more of your income until you pay them off. To decide which loans to pay off first you need to calculate which debt is costing you the most and try to get rid of it. For example, a payment of $500 for a loan of $3,000 at a rate of 18% interest rate is more helpful than paying off a loan of $500 at a 6% interest rate. It’s best to pay off as much of your high-cost loans as you can so you can free yourself from the burden of huge payments each month which will help you use your money in more productive ways. However, don’t ignore the lower interest rate loans and pay at least their minimums each month to prevent any dings to your credit score.
- Improve Your Credit Score
If you are in the search of a good opportunity to grab an amazing house loan or a car loan at a reasonable interest rate, then your credit score is the most important factor. It needs to be taken care of because it can help you get a loan at a reasonable rate. Thus, if your motivation is to pay off debts for a future loan, then you need to be peculiar about repaying your credit card bills with closer credit limits or loans that need immediate repayment. This will help you get positive scores on your credit score and help you in future.
- Stick to the Plan
It’s important to note that one should always stick to the plan irrespective of the fact whichever debt repayment strategy they are using. One should be persistent about repaying their auto title loans in Las Vegas and stick to the strategy that has been planned in order to avoid any inconveniences in the future.
It’s important to wisely pay off debts in order to ensure financial stability in the future.
Joseph Priebe is a graphic designer and photographer unleashed as a content marketer. When he’s not writing about loans or saving money, he’s scraping his pennies together for a 68 Camaro.