How to Prioritise Debts for Accelerated Payoff

Everyone carries debt during their lifetime, and that is not necessarily a bad thing. Having debt means that you have been deemed worthy of credit and that you are simply in the process of repaying the money which you have borrowed.

The caveat is that the business or person who loaned you the money is charging you for the use of their money in the form of interest. Very few individuals have the money on hand to purchase a home or a vehicle and pay cash for it, so financing is the option which makes the most sense.

There are also times, when you don’t have the time to save for a major purchase such as a car or home repair, travel or other costly item. Paying interest on a loan is a small price to pay for the privilege of using credit.

But if for some reason you find that your financial situation has improved, such as a promotion or wage increase, you might decide that you want to learn how to prioritize debts for accelerated payoff. There are just a few simple steps to follow to determine what debt to pay off first to save you the most money.

Know the Terms of Your Loans

When you financed a loan for a car, house or even a personal loan, there are repayment terms that you agree to. They are all listed on the rather long document that you signed when you took out the loan. Many consumers will simply scan the document and some will not even read any of it, which it not wise.

The terms of the loan dictate how and when you will be allowed to pay the money back to the lender. One of the key terms to look for is an early repayment penalty. This means that if you ask for 48 months to repay the loan and are granted 48 months, then you can’t pay the loan back any sooner without paying a penalty.

The reason for the penalty is simple. The lender is giving you money to use and in return you are repaying the original amount of the loan plus interest. If you pay the loan off before the end of the payment period, then you pay the lender less interest.

Plainly put, paying a loan off early is great for you because you save money in the form of less interest paid. But the flip side of that is that the lender gets less money in interest, so they would rather wait to get full repayment and more interest. This is not a very common term in loans but it is a term in some and you will want to be aware of it if it is a part of the agreement you are signing.

Take the time to read the entire loan document completely and ask questions if there are any terms that you do not understand or are not comfortable with. Once you sign the document, you have committed to all of the terms of the loan.

Know Your Interest Rate

Included in all of that fine print in your loan document is the interest rate which you are agreeing to pay. The rate is sometimes determined by your credit score and other times a lender or creditor simply offers a given rate to anyone who finances or borrows from them.

Either way, the rates on your various loans and debts will most likely be different. It only makes sense to prioritize your accelerated payments on the debt which carries the highest interest rate. As long as all of the other terms of your loans are the same or very similar, then certainly focus on paying off the loan with the highest interest rate. Paying that loan off first represents your greatest potential for savings.

Make the Most of Good Interest Rates

Once you have determined the interest rate you are paying on each debt, you might also want to move some debt with higher interest rates to a lower interest credit card. Many credit card companies offer low of no interest on balance transfers for several months to a year, like car title loans with no inspection. This is another great way to save money by paying less interest now that you are aware of all the interest rates you are paying.

Can Interest Be Good?

The only exception to selecting the highest interest rate to pay off first, is if that interest is tax deductible. If your highest interest rate is on your home for example, in the form of a mortgage, then that interest is tax deductible each year. You would want to pay off the loan with the next highest interest rate which would allow you to continue to use the interest on your mortgage as a tax deduction.

Interest paid on a home equity line of credit is also tax deductible so that would also be a lower priority for early repayment. In addition, interest on student loans and interest on some business loans are both tax deductible so you would want to select other debts to off before these. Once you have paid off all of your debt with non-deductible interest, then you would begin paying off the debt with the lowest interest first in order to maximize your tax deductible interest.

Lower Interest Means Saving Money

Taking the time to investigate all of the different interest rates you are paying to decide what debt to pay off first is a great way to save money and pay down your debt more quickly.

Paying less interest means you are paying off the principal loan more rapidly. This is an important step in building or improving your credit and credit score.

But it is also very important to not be overly anxious to pay off debt if the result is not being able to stay current on all of your monthly living expenses. Never risk an eviction from your rental property or foreclosure on your home as a result of missing a rent or mortgage payment.

Looking for a title loan without a job? Plan your monthly budget and then use extra funds to make additional payments on your debt. Each time you pay off one debt, you will discover a great sense of accomplishment and will have more money to pay off the next debt even more quickly. You will enjoy less debt, less stress and a better financial future.

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