Which Loans Should I Pay Off First? - Refresh Financial

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Which Loans Should I Pay Off First?

 Which Loans Should I Pay Off First?

If you are trying to pay off the money you owe but you’re unsure of where to start, you’re in the same boat as many Canadians. It can be hard to decide which one to focus on. Some people will say that you should pay off your biggest loan first while others say your smallest one should be the top priority. However, the wisest choice could be neither of these options. If you’re asking yourself which loans should I pay off first, continue reading for some valuable insight!

Consider the loan which has the highest interest rate.

If one of your loans has a much higher interest rate than the others, then paying that one off first will save you the most amount of money. Prioritizing the higher interest debts and eliminating them as fast as you can, will save you the most in the long run.

The ‘snowball method’ is another strategy to consider. This is where you focus your resources on your smallest debt first while making sure you meet the minimum requirements on your other debts. Once your smallest debt is paid off, you can take those extra resources and focus them on your next smallest debt. It becomes a process of elimination. Many money gurus will claim that this is the most effective method to reduce debt, but there is a potential downside.

Potential Savings

If your largest loan happens to have the highest interest rate, then using the snowball method will be more expensive than if you focused on that one first. Waiting to pay off your high-interest debts will always be expensive.

How To Decide Which Strategy To Use

If you’re trying to decide which loan to start putting your efforts towards, calculate how long it will take to pay off the loan with the highest interest rate using the snowball method vs how long it will take if you focus on the specific loan first.

Whichever choice proves to be the shortest period of time will be the one that saves you the most money. If your smallest debt happens to have the highest interest rate, then the snowball method will be the obvious choice. If your biggest debt is the one with the steepest interest rate, then you’ll want to start there.

Deciding which loan to pay off first will ultimately come down to your lifestyle demands. You might just need the extra momentum that the snowball method provides, or maybe you’ve had one particular loan for so long now, that you just can’t wait to get it off your plate. Remember, as long as you’re making a conscious effort to repay your loans as fast as possible, you’re headed in the right direction.

Have you ever found yourself in this situation? How did you determine which loans to pay off first? Let us know in the comments!

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