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How you Should Decide What Debt to Pay Off first

a few strategies you can use to repay your debts

The decision regarding which of your debt you should pay off first depends on several factors. All debts are not the same and hence cannot be managed equally. You need to consider your income, the expenses you incur, and other financial obligations. How you tackle the payment of your debts, whether big or small, depends on your personal circumstances.

This article will help you decide what debt to pay off first, but before that, let’s look at the kinds of debt we are talking about.

Kinds of Debt

Secured debt and unsecured debt: A secured debt is supported by collateral, which if you don’t pay off or delay the payments, the lender has the right to take possession of the collateral. On the other hand, unsecured debt doesn’t need collateral, but it too can hurt your credit score if you make delayed payments.

Installment Loans: A loan borrowed as a lump sum and then paid off in monthly installments over the next few months or years. These installment loans include mortgages on homes, auto loans, student and personal loans.

Revolving Debts: This is money you can borrow from an available balance instead of taking a lump-sum amount. A revolving debt allows you to borrow at any time, unlike installments where you borrow once and make payments. Examples of revolving debts are credit cards, personal lines of credit, and home equity lines of credit.

Debt Repayment Strategies

The three most common and popular strategies people use to pay off their debts are:

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The Debt Avalanche Method: In this method, you pay off those debts first which have the highest interest rates. Though requiring much patience, the method helps you save the most money. You make the minimum payments on all your debts while using all the extra funds you have to pay off the debt with the highest interest rate. Using this strategy, only those people benefit who can face the challenge of paying high loan balances, which take years to pay off otherwise.

The Debt Snowball Method: The debt snowball method focuses on the payment of loans with the lowest balance regardless of the interest rates. This debt payment strategy gives you enough time to repay the loans with the highest balances later. This works well for people who respond to small victories and are not really patient enough to address the issues of significant balances.

Debt by Emotional and Financial Stress: Sometimes, debt payment might have nothing to do with interest rates or low/high balances. In this case, the repayment is exclusively based on how it makes you feel. For example, you might feel more obligated to pay off a loan that you have borrowed from a family member or friend instead of repaying one with a higher interest rate but borrowed from a bank or financial institution.

Final Thoughts On What Debt To Pay Off First

If you cannot decide which debts to repay first, you can always contact a certified credit counselor for opinions and suggestions. Non-profit credit counseling can be received for free and will provide you with solutions to assist you in making the best decisions regarding your circumstances.

Stay focused and stick to the payoff strategy you have chosen. Pay off those debts like a game of chess by slowly and continuously eliminating each piece of debt until you come out a winner!

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Written By

Travis Barnett is an expert in finances backed by 10 years of experience as a financial analyst at CNB. He graduated from UCLA's Anderson School of Management in 2010 and has been in the field ever since. Travis now enjoys sharing his business experience with others as a financial writer in San Diego. In his spare time, he enjoys hitting the links and working on his golf swing.

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