When you have debt to pay it can feel like you’re carrying around a weight on your shoulders every day. But what happens when you have a mortgage, a car loan and a credit card to pay off all at once?
Having multiple sources of debt can be overwhelming, so we’ve spoken to an expert about which debt you should pay off first.
“A Lannister always pays his debts”…
If you’re wondering which of your debts to pay off first, the answer is simple – whichever has the highest interest rate.
Some consumers make the mistake of paying down all their loans at the same rate or prioritising the biggest loan.
However, all things being equal, more expensive debt should be repaid before less expensive debt, according to Torrance Kassabian, a financial planner with BT Financial Group.
“There are a number of things that impact paying off debts, such as early exit fees. But, theoretically, the debts to pay off first should be the ones that have the higher interest rates,” he says.
Credit card before mortgage
Imagine you have some or all of these loans – a $400,000 mortgage at 4 per cent, a $20,000 car loan at 8 per cent, a $15,000 student loan at 2 per cent, a $10,000 personal loan at 10 per cent and a $5,000 credit card debt at 15 per cent.
All things being equal, the debts should be repaid in this order – credit card, personal loan, car loan, mortgage, student loan.
Mr Kassabian says consumers should make the minimum allowable repayments on lower-rate debts such as mortgages so they can devote the maximum amount of money to higher-rate debts such as credit cards.
Debt consolidation can save you money
He also favours debt consolidation, in which, say, a consumer might roll a $400,000 mortgage, $10,000 personal loan and $5,000 credit card debt into a single $415,000 mortgage.
“It does depend on potential break costs, but all things being equal, if you can bundle them together and get a better rate of interest on the combined loan, it would be better to combine them because you’re paying less interest on the same balance,” he says.
Consumers should get expert advice before consolidating debts to ensure they properly understand all the potential costs, according to Mr Kassabian.