The Ideal Order of Paying Off Debts

The Ideal Order of Paying Off Debts

Paying off debts is one of the most liberating things to do as an adult. If we can, it would be rewarding deed to pay off debts all at once. However, that is not always the case. Not all have the means to pay off debts at the same time.

Sometimes, there are other financial goals we strive to achieve, which is far more critical than being debt-free. For some, it makes better sense that we place emergency funds and investments on the top of our priority. Consequently, only a limited amount is left for the payment of debts. But, what happens if all your debts are almost due, which one should you pay off first?

In this article, we will list down a hierarchy of which debts one should ideally pay first.

Secured Debts

Secured debts are obligations backed or secured by collateral. The most common examples of these are mortgages and car loans.

If the borrower defaults in paying the loan, the lender is allowed to seize the collateral. After that, the lender sells it in an auction sale. Finally, the former applies the proceeds of the sale to the payment of the obligation.

Although it comes with a lien, this kind of loan is not always burdensome. It is because, typically, this type of loan is payable over a specified period. You can pay off the loan in installments, which allows you to pay the principal and interest of the loan monthly, quarterly, semi-annually, or annually.

However, since these debts are usually of large amount, missing an installment would make the subsequent one more demanding. Hence, if you miss out on several installments, you will find it hard to catch up on the payment, and, as a result, you will run the risk of losing your property. That is why it would be ideal if in determining which debts to pay first, secured debts should be at the top of your list.

Tax Dues and Utility Payments

Next to secured debts are tax dues and utility payments.

If taxes on your income or property is not automatically deducted from your salary, set the alarm and schedule the payment of taxes regularly. You should make sure that you do not miss any filing and payment of your tax return. Otherwise, failure to pay taxes could result in a ballooned tax liability in the future. In some places, non-payment of taxes carries penal sanctions.

As to utility payments,  it is because of the necessity that you should promptly pay your utility bills. Your water and electricity accounts should always be updated. The water and electric companies cut off the customer’s line when the dues on the said utilities are not paid. Reconnection fees often are expensive and should be avoided.

Unsecured Debts with  High Interest

High-interest debts are of high priority, practically, because they cost you the most money. It makes perfect sense that you will likely want to pay off these debts first. Once you are free of obligations bearing high-interest rates, you can now make more room for paying your other debts. This will save you a lot of money on interest in the long run.

Unsecured Debts with Low Interest

Lastly, we now pay low-interest debts. These debts are usually last in priority because there is no attaching lien to it. Also, the amount of interest you pay for this type of loan is not so much of a burden as compared to those with higher rates. Nevertheless, it is always advisable that you pay these types of loans as soon as possible so that you won’t have to think of so many obligations. Also, you can utilize more money on other things. 

Takeaway

There is no hard and fast rule in managing and settling one’s finances. It depends mostly on a person’s priorities. That is why a projection of which debts to pay first should cater to one’s demands and preferences.

The above list is shown to be helpful to most people whose priority is to lessen the burden of paying more substantial amounts in the long run. But others may have a different opinion, precisely because they also have a lot of things to consider personally. 

Nonetheless, it is worthwhile to remind ourselves that using our limited cash at the wrong debt could make matters worse. It could place us in a deeper debt, which is a worse situation than we initially have been. For that reason, we should always think of the wisest way to use our cash.

About the Author

Tiffany Wagner is an upcoming business student of a well-reputed university. She dreamed of becoming a financial consultant in the future. At present, she enjoys reading books about finance, travel, and success stories. Tiffany claims to be an independent person whose dreams and ambitions are of top priority. As a budding success story herself, she likes sharing her insights on finance and her recent adventures in business and life.