Posted on October - 20 - 2010
Debt management: Which debts to pay off first?
Financial experts may distinguish between “good debt” and “bad debt,” but your circumstances can help with determining how to prioritize paying off your debt. Here’s how debts can cost high finance charges and more:
- Pay day loans: These short term loans are offered at astronomical rates; the high rates and penalty fees can make it difficult to pay off pay day loans. If you have any pay day loans or cash advances drawn against a bank account, pay them off first.
- Auto title loans: Although it’s possible to refinance your vehicle through a bank or credit union, payday lenders may offer auto title loans at much higher cost. Using your vehicle as collateral for a loan can lead to a visit from the repo man if you fail to make payments. Taking out auto title loans is risky if you’re already having financial problems.
- High APR consumer debt: The annual percentage rate (APR) is the amount a debt costs annually expressed as a percentage of the debt amount. Many credit cards carry interest rates of 20 percent or more along with penalty and membership fees. This boosts the APR to levels that can make if very difficult to pay off credit card debt.
- Personal loans: Although family and friends may not charge interest or fees for that $100 loan, you’ll want to pay off personal loans quickly. Otherwise, you risk losing friendships and having family problems. Treat personal loans the same as bank and credit card debt, and pay up as quickly as you can.
- Student loans: Ignoring student loans can ruin your credit. If you have several student loans, look into federal student loan consolidation. This rolls several student loans into one loan with one payment at a fixed interest rate. The interest rate for federal student loans changes annually on July 1. Check out the US Department of Education website for more information on federal student loan debt consolidation.
Debt consolidation for people with bad credit includes consumer credit counseling and debt consolidation programs; these services can help with developing a cash-based budget and affordable debt consolidation/repayment plans.
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