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Which Debt Should I Pay Off First? All Your Questions Answered

Which Debt Should I Pay Off First? All Your Questions Answered

When you’re preparing to apply for an auto loan, one of the things you’ll need to do is look at your current debt level. All lenders will do the same thing and base their decision on whether they think you’re carrying too much debt or not. So how do you prioritize paying off debt? We asked our Ohsweken auto loans team to outline which debts to prioritize and how to pay them all off quickly so you can get that car loan.


Which debts should you pay off first?


The short answer to what debts to pay off first is, the most expensive debt. There is a more nuanced answer to that though.


First off, collate all your debts into your household budget and create a debt column. Outline everything you owe, how much and what interest rate you’re paying.


Order that debt with the highest rate at the top and the lowest at the bottom.


There are a couple of strategies you can use to pay off debt:


Highest interest rate first


Once you have listed all your debt, plan to pay off the highest interest rate first. That will typically be credit cards but may be a payday loan.


A higher interest rate means a higher percentage of every payment going to interest and not to paying down the debt. This is why we pay this first. Eventually, you’ll get to a position where more of each payment is paying the debt and not the interest.


Put all your spare cash into paying the most expensive debt as quickly as possible.


Smallest balances first


If you have several smaller debts with a couple of hundred dollars on each, you could pay these off first. That reduces the number of debts you have and tidies things up ready to tackle the larger debts.


This only really works if you can settle those debts within a month or three. Otherwise, it doesn’t really make sense to spend longer paying these off.


If you can settle a smaller debt in a month or two, throw everything at it to get it paid. Then you can switch to the highest rate first approach.


You could also use a combination of these two in order to pay off higher interest debts while also clearing those pesky smaller debts. Much will depend on how much disposable income you have at the end of each month.


Consider consolidating


You could also consider a consolidation auto loan. This is where you borrow more than the car is worth and pay off all your other debts with the loan. It will mean borrowing more and likely, higher monthly payments.


It will also mean having only one debt to service each month and one lot of interest to pay.


It’s only work consolidating if you can pay all or the vast majority of your debts with the loan, otherwise it won’t provide the benefits you’re looking for.


When you’re ready for a car lease or loan, get in touch with the Ohsweken auto loan experts at Northway Ford for great deals on auto finance.


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Categories: Car Loan

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