Are you wondering which loans to pay off first? The reality is that you are not alone. Your financial awareness can help you avoid common mistakes made by many people.
Did you know that almost 40 million Americans today live in homes they cannot afford? Well, this is because most people don’t understand their financial situation.
These repayment tips are meant to help you re-frame your thinking. Read on to find out the best way to go about loan repayment.
1. Analyze Which Loans Are Good and Bad
This is the most critical factor you need to consider when paying your loans. Loans can help or hurt you depending on how you manage payment.
Student loans, mortgages, and business loans are considered good debts. This because they are either as assets or personal investments. However, even if its ideal to pay them off as soon as possible, your bad debts should be given priority.
Bad debts include credit cards debts, car loans, pay advance, and personal loans. The financially-savvy option is focusing on bad debts first. That said, it is important to note that even the good debts have to be paid.
2. Repay the Loans Based on the Terms
Loans have different terms some are stringent while others don’t have strict conditions. Terms include;-
• Collateral,
• Minimum monthly payment amount,
• Late fees, penalties for default,
• Annual Percentage Rate for each loan,
• Other issues contained in the loan contract.
Hence, you should prioritize paying loans with stringent terms to avoid repercussions.
3. Begin Debt Repayment Based on Interest Rates
This is the debt avalanche method that focuses on debts with the highest interest rates. The same way you’d like to begin with the most challenging tasks in real life.
How much can you afford to pay monthly without disrupting your budget? This is a question that needs careful analysis.
It is not exactly a motivating method since you may take a long time to clear the huge interest debts. Hence you could start with paying loans with small balances and then switching to those with interest.
4. The Lowest Balance Will Determine Which Loans to Pay off First
Also known as the debt snowball method, this approach allows you to clear the small loans first.
The main downside when it comes to the snowball method is that you pay loans for longer.
Paying off low balances first gives you small wins that keep you going. Repaying loans can seem like a thankless endeavor, but this method motivates you. Ensure that your efforts towards repaying the loans are a consistent month after month.
5. Repay Based on Getting Healthy Credit Score
Do you intend to make an expensive purchase in the future? Well, you need a good credit score. Hence, you could repay the loans by starting with paying every credit card and using only 30% of available credit.
Even under LoansUnder36 review you need better credit score to get better interest rates. With a good credit score, you qualify for loans with low rates.
Consider using a credit builder loan to improve your credit score. Any loan repayment that helps you with your credit score is welcome.
6. Equal Treatment
The equal treatment method aims to see all your balances decrease at the same time. This approach allows you to handle all your debts as a single challenge.
Only choose equal treatment if it keeps you motivated. It is advisable to apply payments of paid off loans to the next one in line.
7. Refinancing Your Loan
Taking out a new loan to repay an outstanding one can sometimes be a wise choice. Should I refinance my student loans? This is a question many college students tend to ask.
Refinancing your student’s loan allows you to merge them into one. This gives you an easier time managing the repayment.
Consider LoansUnder36 to repay some of your unsecured loans. You dont need to have a minimum credit score, plus you dont have to put up collateral like other loans.
Bottom Line
How many years will it take me to be completely debt free? Well, this careful analysis is the first step towards prioritizing the most critical loan to clear.
Which loans to pay off first? You can switch between the debt avalanche method, Equal treatment method, and the snowball method. Always use a loan payoff calculator to get your facts right.
