Which loan should you pay off first?

cut loan debtHow often do you look at the balance owing on your mortgage and feel instantly deflated?  You’re not alone.  Home loans are generally for large amounts of money, so it’s not surprising that we speak to many Bacchus Marsh home owners who tell us about the extra repayments they’re planning to make to try to make a dent in the balance, and the stress they feel at having such a large sum owing.

While it’s always very important to speak to a financial expert about your specific circumstances, we can offer a couple of thoughts that may help.  The important thing to consider when deciding which of your loans to pay off first, there are two things to consider.

The first concerns the facts and figures of each loan.  Typically, a home loan will be the loan you have with the largest balance owing.  However, it will also generally be the one with the lowest interest rate.  If you want to cut down on the money you’re throwing away on interest, (i.e. the money you’re charged on top of what you are actually borrowing that you never actually get to see or enjoy spending), it makes more sense to pay off those smaller loans with the highest interest rates first.

The second thing to consider is the psychological impact.  Paying off multiple loans can negatively affect your mood just as much as your bank balance.  By paying off the smaller, high interest loans first, you will feel as though you’re actually getting somewhere.  Each time a loan is paid off, you have that extra money sitting in your account, and you can mentally check it off your list of financial burdens.

Of course it would be wonderful to own your slice of Bacchus Marsh real estate outright, but if you’re struggling to make your monthly pay stretch across all of your multiple debts and payment plans, now might not be the best time to focus on it.  If you’re in a bit of a financial mess, we encourage you to speak to an expert who can help you to understand how to make your money work best for you.