Paying Off Debts In The Wrong Order May Be An Expensive Mistake

 

Many individuals reach a point where they decide to pay off their debts. The difficult part is deciding which debts need to be paid first. The answer is not the same for everyone. Americans currently have a lot of debt. A study revealed during the fourth quarter of 2017 this debt has reached a new high of $13.15 trillion. The mortgage loan balances increased 1.6 percent, credit cards increased 3.2 percent and student loans rose 1.5 percent. The majority of people in the United States are paying debts every single month. There are factors to consider before deciding which debts should be paid off first.

 

Unsecured Debts

 

The first debts to pay off have high interest rates and are unsecured. This category includes unsecured debts such as personal loans and credit cards. Another good example of unsecured debt are student loans. In most instances the interest rates are not extremely high. Paying off a student loan with the interest rate at approximately 4.5 percent will not provide the same savings as paying off a credit card balance of roughly $5,000 with a high interest rate of eighteen percent. When a debt has a higher rate of interest the amount due increases a lot quicker. It can take years to pay off a credit card only making the minimum payment, even $5 more per month can help make a dent.

 

The Debt Snowball Method

 

The experts all seem to offer different advice. Some experts believe the credit cards with the smallest balances should be paid off first regardless of the interest rate. The idea is these cards are easier to pay off because the balances are lower. There is also the theory that when a debt is completely removed it will provide the lift necessary to inspire individuals to pay off all their other debts as well. This is often called the debt snowball method. This approach will not provide the best savings. If this approach helps the person to remain motivated and helps prevent them from giving up it may be the right choice. The goal is to pay off all the debts. Some people need to have small victories along the way to succeed. This is provided by the debt snowball method.

 

The Secured Debts

 

A secured debt has some type of asset used as collateral. An auto loan is secured by the vehicle. If the payments are not made on the auto loan the lender has the right to repossess the vehicle. A mortgage loan has been secured with the home. If the payments are not made the lender has the fight to file for foreclosure on the home. No assets can be seized when credit card payments fall behind. The financial institution will probably add penalties for late payments. This will cause a sharp decline in the credit score. If the payments fall too far behind the debt collectors can seek a court judgement. If they are successful a portion of the individuals earnings can be garnished. This is not as serious as no longer having a car to drive to work or a place to live.

 

The Priority

 

Any individual who has fallen far behind on either auto or mortgage loan payments may be worried about defaulting. These payments should be the priority. This remains true even if the interest rate is a lot lower than on any credit cards. This is not the least expensive way to pay off debts but it will ensure the individual still has a roof over their head.

There are times when a personal loan can assist in paying off debt – for example, when an individual knows that they are starting a new job soon or has fallen behind due to an unusual circumstance that they are confident that they can bounce back from. When that’s the case, contact BMG Money. We offer responsible lending options, and we want our customers to achieve financial success!

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