Debt is inevitable! We all need some amount of debt to get along in life and buy the things that we would never be able to afford without borrowing money! But when paying off debt, which ones should you prioritise? Find out here with Personal Loans Now
- Whether secured debt should be a priority
- Whether we need to prioritise student debt
- Knowing which debts are the priority
- Consequences of not prioritising debts
Paying Off Debt
What are good and bad debts?
Good debt is taken out to help you get along in life. For example, some good debts can be student loans – these enable you to prosper and gain a career. Another example is a mortgage. This can also allow you to invest money in a property that you would not have been able to afford otherwise, or a car loan for a vehicle that serves you and saves you money in the long run. All good debts are loans that you can afford to repay and live comfortably. Bad debts are things that you may have bought without really being able to afford them. When you cannot meet your repayments, then your debts are considered bad.
Secured debts are money that has been loaned to you which you secure against some collateral. This could be your home, in the case of your mortgage, or your car if it were a car loan. Logbook loans are also secured against the car that you have purchased. To lend you a large sum of money that would be needed to make an expensive purchase such as a home or a car, a lender wants some security against the loan so that the risk of you not repaying them is lower. If you fail to meet your repayments a lender could take the item that you have purchased. In light of this, it is a good idea to start by paying off debt that is secured and other priority debts.
Should I Prioritise My Unsecured Debt?
When lender loans a sum of money that does not have any security against it, the chances of the borrower not repaying the money back are higher. This is the reason that lenders charge a higher rate of interest on unsecured loans. Examples of unsecured debt are payday loans, credit card debt, personal loans, peer-to-peer lending and store cards. Most people who use credit cards do repay the balance at the end of the month. Failure to do this can incur interest payments of around 20% a year.
When a person suffers a loss of income, or some other financial hiccup, along with the other debts that they have to repay, these high credit card repayments can soon become unmanageable for them. Payday loans were responsible in the past for people getting into a lot of debt, but since the regulation of the payday loan industry their interest rates and fees have been capped, making them less of a problem debt. A bank can send letters and threaten a borrower with court action if they do not repay their loans and downgrade their credit score. You will need to repay them as well, but there are other debts that should take priority.
So what have we learned so far?
- Most people need to borrow money to get along in life.
- Good debt helps you get a career, a car or a home at a repayment pace that you can afford.
- Bad debts are ones that you have taken but cannot afford to pay back.
- Secured debt is money loaned against some collateral.
- If you fail to repay the lender can repossess your security on loan.
- Unsecured debt costs more and does not need collateral.
- Paying off debt must be done according to priority.
Should Student Debt Take Priority?
Student debt is not a debt in the way we usually refer to debts. It is because of this that many financial experts believe that student debt should be re-named and called “graduate tax”. For people who have taken out these student loans to get an education, they only pay back what they owe once they start earning over £21,000 a year. This figure is due to be raised to £25,000 shortly. When a person is not working the repayments won’t be due until they are earning once again. The amount they pay back is relevant to the amount borrowed, so many people never repay the whole debt.
Distinguish Which Debts are Considered Priority Debts
As mentioned already, you paying off debt should be done according to priority. Priority debts are not necessarily the biggest or the ones with the highest interest rates. Instead, they should be judged by the impact that they could have on your life when you fail to repay them. Some priority debts include:
You should Pay Priority Debts Off First
Failure to prioritise debts and pay them off first could lead to a visit from bailiffs or result in a court summons. Not paying your bills could end in bankruptcy and you being very embarrassed by losing everything of value that you own. If you do not pay your energy bills, they can cut off the power to your home, and you would have no light or heating. The worst thing would be failing to pay your mortgage and seeing all your hard work that was needed to buy a home go down the drain as they could repossess it.
Seek Advice if Your Debts are Unmanageable
You can find free debt advice from many charitable organisations in the UK. They can help people prioritise their debts and work out repayment programmes with creditors on their behalf. Most people who find themselves in debt do not know where to turn and can delay seeking help, in which time they get into more trouble. When a person cannot afford to feed themselves and cannot repay their debts, then they must seek help as soon as possible.
In conclusion, all debts should be considered priority over anything more than basic living standards. Some debts need to take precedence as the consequences of not repaying them can be more damaging than other debts. Paying off debt that has the most serious impact on your life should be considered more important but any borrowed money must be repaid at some point unless a person chooses to ruin their reputation and suffer the consequences of going bankrupt for many years to follow.
Debt advisers know how to sort out people’s debts and prioritise them. For this reason, as most of us are not debt management experts, it is important to speak to a professional who can offer free help and advice. They know how to speak to your creditors and make repayment plans that you will be able to manage.