In today’s society, there are more and more people who struggle with their monthly bills. Even those who have stable jobs with a steady source of income, even they find it hard at times to keep their financial stability. There is always the possibility of an unexpected event that will require immediate financial attention. In such situations, people are often unable to make the needed payments due to a lack of funds. Usually, their only option is to get financial assistance. When, for some reason, friend and family are not a viable choice for borrowing money, most people turn to the loan lending industry.
The loan lending industry is becoming more popular as our lives get more expensive. Today, there are many loan lenders offering various types of loans. In such times, people often find themselves falling into debt cycle, taking out a loan only to repay a previous one. For people in such a situation, it is of great importance to know which loan they should prioritize and which they should leave for last. Below, we will try to answer which loan should you pay off first in order to end your debt cycle and regain your financial stability as fast as possible.
Find out exactly what are you dealing with
In order to pay off all your loan and end your debt cycle, you must first understand exactly what kind of a mess you are into. You need to understand what kinds of debts you have. Then you can start comparing them and the way each different debt you have is affecting your current finances and how each debt affect your financial state in the long term. Money that you borrow to go through college is generally considered as ‘good debt’ and that is due to the fact that such loans are mainly meant to help you advance in your career and in the long run, they become something more similar to an investment rather than a simple loan.
On the other hand, debt like credit card debt is generally considered as bad debt. This is because credit card debts are consumer debts with no investment benefits whatsoever. They also usually come with very high fees and interest rates. Another benefit of student loans compared to credit card debt is that they are usually tax deductible, and credit card debts just aren’t. There are some cases where that is possible, if, for example, you run a business, you may be able to take as a tax deduction all interest that has been paid on your credit card balance. But such cases are rare.
Are you current on all debts?
Before you start prioritizing your debt repayment order, you need to make you sure that you are current with all your debt payments. Even though you would probably want to pay off all your debts as fast as possible, it is absolutely crucial to make sure that you are at least making minimal payments on all your debts until your debt payoff plan is ready for execution.
If you miss a payment on some of your debts or if you are late with a payment, it will result in decreasing your credit score. And the decrease in your credit rating can impact negatively your overall credit history, which is something that you do not want. This is because a good credit rating is normally an essential factor for getting the market’s best offers on interest rates and also for qualifying for other available types of financial assistance.
Credit card debt versus student loans
We have already mentioned above that student loans are generally considered to be better than credit card debts, as they are often more of an investment than credit card debts are. So it may be pretty obvious to assume that paying off your credit card debt should be a priority. However, there are a number of factors that you must take into consideration.
Student loan facts:
- Student loans have interest rates that are a lot lower than most credit card debts
- While they are not eligible for bankruptcy, they can be reduced or even forgiven
- Your student loans may potentially take several decades to completely pay off
- In order to get a student loan, there is no history of credit required.
Credit card debt facts:
- With credit card debt, making only minimum payments could pretty much keep you in debt for the rest of your life
- Credit card debts have interest rates that are significantly higher than the interest rates on student loans
- Credit card debt can be discharged in bankruptcy
- You usually need to have perfect or at least a good credit score to be approved for a credit card
Which loan should you pay off first?
So, which debt type is better and which is worse, which one should you prioritize?
Both credit card debts and student loans can keep you paying for many years if you are not able to deal with them fast enough. If you only make minimum payments each month, both types can be quite overwhelming. Student loans may prove to be worse in the long run due to the the big amount of debt you will already need to repay at the beginning of your career.
However, credit card debts have extremely high interest rates and fees and little to none investment qualities. In the end, it all comes down to what your financial goals are and which debt you feel more comfortable paying off first. Do not forget that any type of debt, no matter what its terms and conditions are, is still a debt. And you do not want to keep repaying it forever. So structure your budget in a way that allows you to pay off whatever debt you have as fast as possible.