When you have multiple debts that you need to repay, deciding exactly how to go about it can be difficult. The right way to do it depends on your circumstances.
It`s important to remember that if you have multiple debts, you will need to make payments towards them all every month. But if you have the money to start overpaying (paying more than necessary towards) certain debts - or even paying them off altogether - then it`s a good opportunity to lessen the burden on your finances and save money in the long run: clearing a debt more quickly means you`ll stop paying interest on it, and it means you won`t have to set aside the money for that payment every month. In this situation, choosing which debt to pay off first is a matter of doing the maths.
In most cases, you should overpay the debts with the highest interest rate first. Because those debts grow the fastest, paying them off in order of interest (highest to lowest rate) should ensure that you pay less overall than you would otherwise.
So, for example, if you have a credit card with an interest rate of 19% and a personal loan with an interest rate of 9%, you`d focus on repaying as much as possible towards your credit card debt each month, while continuing to pay the required amount towards your personal loan. Once the credit card debt has been paid off, you`d start paying more towards the personal loan.
However, keep in mind that you may be limited as to how much you can pay towards certain debts - you may find your lender has imposed limits on overpayments, or will charge an `early repayment fee` if you repay your debt faster than expected.
Whatever your situation, you`ll always need to consider your priority and non-priority debts when it comes to repaying debt.
Your priority debts - debts that could pose a risk to your basic standard of living if they`re left unpaid - must always be considered top priority. That includes things like mortgage payments and secured loans - both of which could result in repossession if you don`t keep up with your payments.
Anyway, it only makes sense to make overpayments if you have extra funds - there`s no point overpaying one debt if it means you`re missing payments towards another, as this could mean you end up being charged, damaging your credit rating, and running the risk of legal action by your lenders.
If you have a debt problem and you`re finding it hard to repay your debts, you should seek independent debt advice as soon as you can.
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Tags: debt, pay off debt, priority , non-priority debts
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