You often hear that there’s good debt and bad debt. That’s probably because it would not sound too great if financial experts went around referring to bad debt and even worse debt.
After all, it’s challenging to live without owing somebody something – right? If you want to buy a house with cash, by the time you save up enough, it may be time to retire. If you’re saving up to buy a car free and clear, you may have to spend a lot of years riding the bus first. Most people get through life by borrowing money.
So sure, there’s good debt (the kind you probably can’t avoid carrying) and there’s bad debt (the kind you should try to get rid of sooner rather than later). One key to determining which debt to pay off now versus later is the interest rate: the lower it is, the longer you can carry the debt without it becoming a burden. Here are some guidelines to help you prioritize your debt.
Mortgage: Pay off later.
If you have a large mortgage and you win the lottery or come into an inheritance that allows you to pay your house off easily, doing it now is probably not a bad idea. But if you make it your main goal to pay off your mortgage, you might end up sacrificing other goals like saving for retirement or your kids’ college education.
Revolving credit card debt: Pay off now.
With the steep interest rates on credit cards, this one’s a no-brainer. Revolving credit card debt is not good, and should be paid off as quickly as you can.
Not only is paying all of that interest expensive, it’s a result of a lifestyle people can’t yet afford. Once you establish a pattern of increasing expenses for your lifestyle, it could be impossible to catch up.
Did you know you can transfer your high-interest credit card balances to First Financial’s Visa Platinum Credit Card, which has a great low rate and no balance transfer fees?*
Student loans: Pay off later.
Let’s just stress that if you have a choice between buying a sports car or retiring that student loan debt, you know what the smart decision is (hopefully you were thinking to pay off the student loan first!).
In most cases, you’ll be just fine if you make the monthly student loan payment and don’t stress over paying it off any faster. Student loans typically tend to have a lower interest rate and an extended payment period. In most cases, if you have an extra thousand dollars, you’re better off using it to pay down your revolving credit card debt than putting it toward student loans (unless this is your only source of debt and your goal is to be debt-free).
Car loans: Pay off sooner rather than later.
If you can buy a perfectly good used car and borrow less, or buy a car without a loan, that’s ideal. But if you’re going to go into debt when you buy an automobile, try not to get stuck in a lengthy loan. Experian Automotive recently reported that in the second quarter of 2014, the average new car loan, for the second quarter in a row, was 66 months. That’s an all-time high. And that’s just the average. Approximately a quarter of new car loans are between 73 and 84 months long. Those are six and seven year car loans.
Historically, the average car loan has been around four to five years, with three years considered to be the sweet spot. Consumers are naturally attracted to an 84 month loan because the monthly payment is far lower than it would be if you took on a 36 month or even 60 month car loan. But you’ll likely pay thousands more with a lengthy loan. You may also find that your warranties will run out long before you make that final payment, and your car may not even last seven years depending upon what you bought.
Did you know at First Financial, our low auto loan rates are the same whether you buy new or used? Be sure to check them out today, and if you like what you see – you can apply for an auto loan online 24/7.**
Car insurance premiums: Pay off now, but only if you can.
This is small potatoes as far as your financial obligations go, and it may not be fair to call it a debt, since you pay as you go with insurance. Still if you have car insurance, it’s a financial obligation that you’re generally stuck paying indefinitely, so it feels like a debt.
If you can pay six or 12 months ahead of time instead of just once a month, you can avoid installment fees, which generally run between $5 and $9 dollars month. These additional costs, although relatively small individually, can add up over a 12 month policy period. Moreover, you’ve not only saved some money – you have one less monthly bill to worry about as you deal with your bigger debt.
On the other hand, if you’re going to have trouble making your car payment because you’re paying for a year’s worth of car insurance, stick with the monthly plan. Paying debt off successfully is really about successfully managing your cash flow.
*APR varies up to 18% when you open your account based on your credit worthiness. This APR is for purchases, balance transfers, and cash advances and will vary with the market based on the Prime Rate. Subject to credit approval. Rates quoted assume excellent borrower credit history. Your actual APR may vary based on your state of residence, approved loan amount, applicable discounts and your credit history. No Annual Fee. Other fees that apply: Cash advance fee of 1% of advance ($5 minimum and $25 maximum), Late Payment Fee of up to $25, Foreign Transaction Fee of 1% plus foreign exchange rate of transaction amount, $5 Card Replacement Fee, and Returned Payment Fee of up to $25. A First Financial membership is required to obtain a VISA Platinum Card and is available to anyone who lives, works, worships, or attends school in Monmouth or Ocean Counties.
**A First Financial membership is required to obtain a First Financial auto loan and is available to anyone who lives, works, worships or attends school in Monmouth or Ocean Counties. Subject to credit approval.
Article Source: Geoff Williams of money.usnews.com, http://money.usnews.com/money/personal-finance/articles/2014/12/11/5-debts-you-should-pay-off-now-or-later