If you’re like most Americans, it’s likely that you have some sort of debt that needs to be paid off. No matter the source of your debt, eliminating it is beneficial for both your wallet and your credit report. The process of becoming debt-free is made much easier if you know what debt you should focus on eliminating first.
By figuring out where to focus your efforts, you can save money, boost credit scores, and efficiently eliminate debt. There’s no one way to handle debt, but having multiple loans and balances can make it difficult to determine where to start. Should you make your student loan a priority or focus on your credit card? Let’s look at whether installment loans or credit cards should be paid off first.
Installment Loans
Installment loans come in various forms but can be defined as loans that are repaid over a specified period of time with scheduled payments. Loan terms and repayment periods can vary significantly, with some loans lasting longer than 30 years while others are meant to be repaid within a few months. Some common types of installment loans include payday loans, mortgage loans, auto loans, and personal loans.
Payday Loans
A payday loan is a small loan that is typically unsecured, so you won’t need to supply collateral. Online, individuals can find a reputable payday advance online from Personal Money Network, one good example of a trusted source for payday loans online.
Mortgage Loans
Mortgage loans are installment loans that are meant to be for the purchase of property. Collateral for mortgage loans are typically the property itself, so missing payments can mean losing your purchased property if the loan defaults.
Auto Loans
An auto loan is an installment loan that allows individuals to purchase motor vehicles. Much like mortgage loans, the collateral for an auto loan is often the vehicle itself. Defaulting on auto loans can result in the repossession of the automobile, so making on-time monthly payments is essential.
Personal Loans
Personal loans are borrowed from a creditor, financial institution, or lender and most of them are unsecured, so you don’t need collateral. Personal loans typically have repayment periods that last anywhere from 2 to 7 years, so you have plenty of time to pay them off.
Credit Cards
Credit cards are not the same as installment loans, though you are still borrowing money from a financial institution. Credit cards are a type of revolving debt, allowing you to make purchases of all kinds. When it comes to paying off debts, your credit card should be a top priority – especially if you have utilized quite a bit of your credit allowance.
Credit card debt is typically the most expensive, as you will often pay higher interest rates than you would with an installment loan. You should also consider paying these off first if you have a higher balance, as high balances on credit cards negatively impact your credit score.
However, you can increase your credit score by managing credit cards properly and paying close attention to your balance and monthly payments. Making payments and lowering this type of debt can both raise your score and save you ton of money on interest payments.
Determining Where to Start
While it is often the ideal choice for individuals to pay off their credit card debt first and foremost, in some cases installment loans should be paid off first. If you’re using less than 30% of your credit balance, you may find it better to focus on installment loan debt if it is higher.
You may also consider focusing on other factors of your debt, such as balances and interest rates, so you can better determine exactly where to start. It helps to make a list of all debts, so you can see exactly which balance is lowest and therefore easiest to pay off. Once your smaller debts have been eliminated, it’s easier to move onto working on getting rid of larger debts.
Look at interest rates as well, as this can make a large difference in the amount you will be paying over the duration of your loan term. Compare interest rates on installment loans and credit cards to help you determine which debts should be prioritized.
It can be confusing to figure out where to start when you want to start paying off debts and eliminating them completely. In most cases, your credit card should be your main focus when it comes to eliminating debt. However, in some cases, individuals may find it more advantageous to eliminate installment loans first. Either way, you will be one step closer to being debt-free.
