If you're like most people in the United States, you have a lot of bills to pay. A loan for an automobile, credit cards, and maybe even a house. When should you pay back money you don't need?
Start with credit cards
If you have more than one loan, the first rule of thumb is to pay off the loan with the highest interest rate. This means that you should never get a payday loan or cash advance on your paycheck. These loans can have very high interest rates, so they should always be paid back first.
But for many people, credit card debt is the debt with the highest interest rate. This should be paid back before you put any extra money toward your mortgage, car payments, or student loans. Even though many people carry a balance on their credit cards, the best thing to do is to not carry a balance or to pay as much as you can each month. This will cut down on how much money you have to spend each month just to pay off your credit cards.
Car Loans, Personal Loans, Renovation Loans, Student Loans
What do you do with your extra money once you've paid off your credit card debt? Again, start with the debt that costs you the most. This means you should compare the interest rate on your car loan to the rates on your other loans.
Consolidation
If you have a lot of loans, especially if you are a student, you might be able to combine them. Visit The Guide to Student Loans at http://www.theguideto-studentloans.com/student loan consolidation/ to learn how to consolidate your loans. If you combine them, you will only have one monthly payment and one interest rate. Remember that it's not always best to lower your monthly payment. You want the lowest possible interest rate so that you can save money in the long run. If you decide to consolidate, the answer is easy: you put the money on the loan that you have already consolidated.
Mortgages
One of the loans with the least taxes is a mortgage. This means that you don't have to pay off your mortgage all at once. But if you can, put extra money toward your mortgage payment. Even if you only add $500 more the first year, you will save more than $500 in interest. Set a goal to pay off your mortgage a little bit faster than you have to. Your other loans with higher interest rates should be paid off first.
Savings
Even though paying off your loans might seem like a good idea, you should also save money for the future. Pay yourself first by putting money away each month into a retirement plan, like a 401k. Once you've paid off your savings and your monthly debt payments, you'll know how much money you still have to spend.
