If you are struggling with the question, “What loans to pay off first?” you need not look further for the answer. The cost of living in this world is demanding. The price is often higher than we can afford on our own, which is why the prevalence of loans and debt is so high. You may be sinking in any number of sources of debt including student, home, business, and credit card debt. Chances are you won’t be able to pay them all at once, which begs the question of where to start.
Before you can determine what loans to pay off first, you must understand the difference between the two types of debt you have. Nobody wants to have any debt, but it’s true that some debts are better than others. The primary difference between good and bad debt lies in the interest. The interest you can write off as you pay constitutes good debt while the interest of bad debt works against you and cannot be written off (such as credit card debt).
Where to Start:
As a rule of thumb, start with the bad debt. Because putting debt off incurs even more debt, you should naturally want to tackle the bad debt first. That being said doesn’t necessarily shirk paying off your good debt in order to wipe out bad debt.
Once you have bad debt under control, you should begin working on paying off good debt. It is imperative, however, that you plan out your payments and do not dive right into paying off different loans. You should attack your debt in an organized and controlled manner so that you know exactly where and when your money is going.
Another part of the payment you should consider when organizing your payments is that with good debt, the interest works, well, in your best interest. This means you should make sure that all of your immediate needs are covered before spending money on debt. Make sure that you have some money going into savings, adequate insurance, and that you can afford immediate needs, such as grocery and utility bills.
Once you have loose ends tied up and are in a comfortable position, you are ready to begin paying off good debt. To further prioritize payments, you should start with the debt that offers the smallest deduction. Also, don’t forget that some loans penalize you for premature payments; be careful not to pay too early.
In conclusion, as a general rule, pay off bad debt before good debt and smaller deductions before larger ones. Don’t forget to ask yourself “What loans to pay off first?” and answer carefully to ensure that your money is used efficiently.