Debt priorities (Which one should be paid off first?)

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Easy…..the most expensive one….

This is a matter of unemotional priorities which should be based on one and only one deciding factor – which debt is costing the most?

The most expensive debt isn’t necessarily linked to one with the highest value; think interest rates.

In general, home loans and educational debt have the lowest interest rates, then followed by personal loans and unsecured personal loans. Finally, you have credit cards which can easily charge interest at 20% or more.

To provide a couple of market examples, at the time of writing, CBA in Australia was quoting 13.9% on 5 year personal unsecured loans.  RateSetter in Australia which runs on a P2P lending model, had in its public loan book, personal loans of similar value and tenure for anything between roughly 3.5% and 11.5%.  The large variance in percentages being charged to borrowers is based on their associated risk-level which takes into account a range of data points such as employment-type (permanent vs. contract), male vs. female, current salary etc.

Knowing that credit cards generally charge the highest interest rates, they should without a doubt, be the highest level of priority when it comes to making repayments. Also knowing that P2P providers like RateSetter exist, and that they will lend to borrowers for the purpose of consolidating and repaying credit card debt at a lower rate, having them as a service provider on your list should be a MUST.

 

Important note: Credit card statements will usually provide you with a monthly outstanding balance and a monthly minimum payment (assuming there is in fact an outstanding balance).  Never pay the monthly minimum. Pay the outstanding balance in full.

Paying the monthly minimum will imply that you still have an outstanding balance, upon which you’ll be charged interest.

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