Debts to pay off first and last
FOCUS ON KNOCKING OFF HIGHER INTEREST LIABILITIES LIKE CREDIT CARDS BEFORE TACKLING THE MORTGAGE
The key to driving down debt fast is knowing what to repay first and what loans to leave until last. Owing money has always been a blessing and a curse, helping people buy things they otherwise couldn’t afford — think houses and cars — but it can also quickly spiral out of control.
Financia managing director Angelo Benedetti says a mortgage is many people’s biggest debt to be reduced, but other debts should usually be focused on first. “The highest interest debt is normally the number one thing you would want to knock off,” Benedetti says
This includes personal loans and credit cards, which can charge interest rates up to 20 per cent that cost you much more than mortgages.
A $10,000 credit card debt can cost $2000 a year in
interest. That same portion i of home loan debt can cost as little as $200 a year based on current rates. An exception to the highest-rate-first rule is if you have almost paid off another debt, such as a car loan or personal loan. Finishing it off fast can deliver a mental boost.
“The money you have allocated to that loan can now be spent on other things,” Benedetti says.
“It’s like a bucket — if you have one hole it drips slowly but if you have 15 holes it drips quickly,” he says.
The last loan to repay is any sort of investment or business debt that is taxdeductible. Investors try to have interest-only loans on their investments until all personal debt is repaid.
“Investment debt gives you a tax benefit, but if investment debt is your only debt you obviously want to pay that off,” Benedetti says.
Marketplace lender SocietyOne’s CEO, Mark Jones, says people should reduce or avoid debts that are confusing or when lenders don’t offer repayment reminders. “A credit card, as an example, might appear to have a low interest rate,” he says.
“But this is often predicated on the consumer following conditions that are sometimes confusing or hidden. The low interest rate may also only be temporary.”
Check the fine print and be careful with buy now, pay later options, Jones says.
“Buy now, pay l later may seem like a free option for consumers, but one quarter of these companies’ revenue is derived by late fees paid by the consumer,” he says.
“Just one $10 late fee on the average BNPL debt of $150 translates to an effective interest rate of 6.67 per cent for the fortnight, which is actually an enormous amount of interest when converted into an annualised rate.”
Jones says consumers with multiple debts should consider consolidating into one lower-cost loan, and that more borrowers have been doing this during COVID-19.
“This could potentially save you hundreds or
thousands of f d dollars ll i in the h long run,” he says.
Former accountant and interior design company owner Merinda Hart says she has always been conscious of keeping on top of debt.
“I strive to manage my own budget and debts as meticulously as I manage those of my clients,” she says.
“This way I know I will always be approved for any future credit I may need.” That’s wise advice indeed.
It’s like a bucket — if you have one hole it drips slowly but if you have 15 holes it drips quickly