From Personal Loans to Mortgages: How to Secure the Lowest Interest Rates and Avoid High-Cost Debt
Debt can cost you money if it carries a high interest rate. This is because you're losing out on the potential return that you could have made by investing that money.
Many classic debt-avoidance
strategies including creating a budget, building an emergency fund and using
caution with buy now, pay later plans can help you avoid unnecessary debt.
However, sometimes you may need to engage in borrowing.
Pay Off High-Interest Debts
First
Carrying debt can be expensive,
with interest charges adding up to significantly increase the total amount you
owe. For this reason, it’s important to pay off high-interest debt first to
reduce your overall cost of borrowing. This approach also helps you achieve
your financial goals more quickly, and can make it easier to secure loans or
credit in the future.
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The best strategy for paying off
your debt depends on your balances, rates and financial situation. However, it
typically makes the most sense to prioritize paying off debt with the highest
interest rate first. This is known as the debt avalanche method and can help
you save money in the long run.
To determine which debts to
target first, start by listing all of your outstanding debts and their balances
in a spreadsheet. Include columns for each debt’s total outstanding balance,
interest rate, minimum payment and regular due date. Once you’ve compiled a
complete list of your debts, rank them in order of their interest rates. Then,
begin systematically repaying them using either the avalanche or snowball
methods of debt repayment.
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Generally speaking, unsecured
debt, like credit cards and payday loans, tends to have the highest interest
rates. On the other hand, secured debt, such as mortgages and auto loans, tend
to have lower rates.
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If you’re trying to decide which
debt to pay off first, consider the total amount you owe and whether any of
your lenders have strict late payment fees or aggressive collection practices.
You may find it helpful to categorize your debts into categories such as credit
card debt, personal loans and private student loans to help you prioritize
which ones to tackle first.
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It’s also worth noting that
paying off your highest debt balance can be a psychological motivator to
continue working on your other debts. In addition, lowering your credit
utilization rate can improve your credit score and make it easier to qualify
for new financing in the future. For these reasons, it’s important to use
strategies that work for your unique circumstances and financial goals.
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