Financial Advice Q&A

Regular Visitor
Posts: 5
What's the right order to pay off my debts?
[ Edited ]

I currently have acquired some hefty debt. I owe about $32,000 on a car, $1,800 on a personal loan and $1,300 in credit card debt. I am thinking of doing the following but not sure if its a good idea. The highest interest rate in order Credit Card - $1,300 Personal Loan - $1,800 Car - $32,000 Is it best to make the payments of each loan, and get rid of the credit card debt and not use the card anymore? Then pay off the personal loan and then apply the remainder balance to the principal of the car? What would you do in my situation?

Posted: 2013-11-01 11:30 PM
Other Answers: 1
Community Manager
Posts: 1,009

No parking - shutterstock_113021353.jpgThe bad news is, I agree with you – that is a rather hefty amount of debt.  The good news is, other than the car, you’re not doing too badly. Here are my thoughts about what you should do from here.


Ditch the ride?
If your car was a rather recent purchase or you didn’t put much down, this probably isn’t really an option but…have considered the idea of trading in the car for something less expensive? Even if you owe more than the car is worth, it’s sometimes worth it to roll that difference into a new loan for a substantially cheaper car. 


For example, let’s say you currently owe $3,000 more than your car is worth and you decide to trade your car in for one that costs $17,000. You’d still have to pay the extra $3,000 but now you’d have a $20,000 car loan instead of one for $32,000.  Of course, this assumes you’d qualify for the new loan and that the numbers work but it might be worth exploring.  Even if it won’t work right now, it’s something to keep in mind as you get further into the loan.  To be clear, for this to work, you’d also have to be comfortable with a huge step down in terms of car status. So it’s really a question of which is more important to you, financial peace of mind or a nicer car.  I know what I’d pick.


Debt elimination plan
If that won’t work (or even if it does), the most financially prudent way to attack multiple debts with differing interest rates is to attack the highest interest rate debt first, just as you’re thinking. It’s even more helpful if you can rearrange your budget to free up some extra cash to throw at your plan. Then as you suggested, as each debt is eliminated, you take it’s former payment and add it to the next highest rate balance.  You just keep doing this until all of the debt is gone.


Emergency fund is key
Finally, one of the biggest keys to keep from adding more debt in the future (in addition to making smarter choices as it relates to incurring more), is to have cash in the bank.  This way, when the unexpected happens you’ll have cash to pay for it rather than needing to revert to credit. We normally recommend having an emergency fund of 3-6 months’ worth of your committed expenses but when you’re dealing with a lot of debt, a smaller goal of as little as $1,000 can be a great place to start.


Thanks so much for your question. I hope this helps and I wish you all the best!



Posted: 2013-11-04 09:15 AM


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