If you owe money to multiple creditors and are working on paying off your debt, you’ll have to decide what order to pay off your balances.
You generally want to make at least the minimum payment to every creditor. But you probably don’t want to spread extra cash around all of your debts, as this could mean it would take too long to pay off any one of them.
There are two common approaches to deciding which debt to focus on. The debt avalanche method involves paying off the loan with the highest rate first to maximize your interest savings. The debt snowball method instead involves the repaying loan with the lowest balance first to improve your motivation by scoring quick wins.
Deciding which of these approaches to take can be difficult, but there’s actually a third option — one that eliminates the problem of choosing what order to pay off debts. Here’s what it is.
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Try this approach to avoid choosing which debt to prioritize
Instead of struggling to choose which of your debts to repay first, consider consolidating all of your outstanding loans into one big debt consolidation loan.
To do this, you’d apply for a personal loan and use the proceeds from it to pay off all of your existing creditors. As long as you can qualify for a large enough personal loan, you’d be left with only one debt to repay. You would have only one monthly payment to make and could send any extra money to just one creditor.
In other words, once you have your consolidation loan, you won’t have to worry about the payoff order. And you won’t have to add up multiple debt balances to see how much progress you’re making on becoming debt free. You’ll know exactly how much you have left to pay back.
Plus, many personal loans also come with fixed monthly payments and a predetermined payoff time (such as three years or five years). If you don’t plan to make extra payments to your personal loan debt, you’ll know upfront exactly when you’ll be free of your debt and how much it will cost you to get there. Of course, if you can make payments ahead of schedule, you’ll reduce both the payoff time and total costs.
Simplifying the payoff process isn’t the only benefit of consolidation either. If you can qualify for a new loan at a reduced rate compared to what your current creditors charge, you’ll also reduce the amount of total interest you’ll pay. More of your money would go to principal (the original amount you borrowed) each month, which would mean that reducing your balance would be easier and cost less over time.
With so many advantages to debt consolidation, you may want to seriously consider shopping around for a personal loan if you’re working on debt paydown. If you find you can qualify for an affordable debt consolidation loan at a low rate and use it to pay off one or more existing debts, definitely consider doing so.
View more information: https://www.fool.com/the-ascent/personal-loans/articles/struggling-to-decide-which-debts-to-pay-first-you-may-not-have-to/