If we have a lot of loans and we want to repay them, then we will need to make a decision as to which to start repaying first. This is not as easy as it might seem as there are a few different factors that we will need to consider when we are making this decision.
Which is the most expensive?
If you want to save the most money, then repaying the most expensive loan will be the best thing to do. Remember that when you are calculating the cost of the loan, you need to consider how much you are paying in interest and fees. Loans can vary a lot in how much they cost and it is worth carefully calculating this. £100 loans for example won’t incur much interest, but larger, £5000 upwards loans will. It can be the case that the loan that is the biggest will be costing us the most but this can depend on the loan type. As a mortgage will have lower charges compared to a payday loan, but we may still be paying more out in monthly interest for the mortgage because we owe so much more money. Make sure you calculate carefully and work out how much each loan is costing you each month.
Which is the smallest?
Some people like the idea of repaying the smallest loan first. They like to quickly get one paid off. That gives them a feeling of satisfaction and will motivate them to carry on and repay the next one as they know that they have managed to pay off one already. It can be a nice feeling to know that you do not have such a high number of debts. If you feel this will be motivating for you then it could be worth considering doing this.
Which is the biggest?
For some people the idea of getting rid of the biggest loan first is the most attractive. It can feel stressful having a big loan and therefore getting rid of that big chunk of debt can feel good. It will take longer to repay than other loans, but this could still be motivating for some people as they will know that they are getting rid of that big chunk of loan.
Which do we want to repay?
Sometimes we have a loan that we would like to get rid of first. It might be that we owe money to a friend or family member and feel that we want to get them their money back as soon as possible. It might be that we have a specific lender that we do not like for some reason and that loan feels stressful to us so we want to get rid of it quickly. There are all sorts of reasons why we might feel that we would rather repay one loan over another.
It is quite a big decision to make, but the fact that you have decided to repay loans is a really good step. It is wise to make sure that you have investigated the loans thoroughly though. You will find that some might have an early redemption fee. This is just a big name for a fee that is charged for repaying a loan early. Some loans do not have these at all, but some will have a small administration charge and others will have a much bigger charge. It is good to make sure that you will not get charged such a large fee that it is more expensive to repay the loan than to leave it. Of course, the cost of the loan may not be your main reason for repaying it, you might just want to be free of the stress of owing money, for example. But it is well worth thinking about this as most people will want to only repay a loan if it saves them money in the long run.