Debt Priority Pay Down For When You Are in Financial Trouble

Arbitrarily speaking, if you are going to prioritize which accounts you want to pay off first in order to save money off your debt, you’ll want to do go by the highest interest rate account to the lowest interest rate account. This is the typical common-sense approach. This is just typically the most cost-effective way to go about doing it. However, there are other strategies like the debt snowball method which call for a more methodical payoff approach for consumers who have a lot of different accounts.

Well what about if you’re on the brink of not being able to afford payments. What should you prioritize if you’re struggling to keep up with payments altogether? If you’re in financial trouble, you’ll want to prioritize which accounts you keep current on quite differently.

Mortgages

Your mortgage will always be and should always be your number one priority. If you lose your job and can only afford to pay one debt obligation, the mortgage is the one you want to stick with and keep current on. You don’t want to lose your house, that is the account you always want to maintain in good standing whenever possible. Your home should be your priority above everything else because it’s a secured asset. The loan is secured against your house, so if you cannot afford to continue making payments it’ll put your house in jeopardy.

Auto Loans

Auto loans are also very important in terms of maintaining your consistency in payments due to the fact that they are also secured loans. Auto loans are secured to the automobile you purchased, so in the event you cannot afford to pay, it’s possible that repossession attempts are made on your car after a prolonged period of delinquency. Like other secured loans, these are very important to maintain good standing on, with regards to your credit worthiness. The negative impact to missing payments on a secure loan obligation are more severe than that of an unsecured loan like a credit card, etc.

Secured Loans and Lines of Credit

It’s important to stress the importance of paying your collateralized debt obligations. If you miss payments on these types of accounts not only is it detrimental to your credit but it also puts the property at risk. So, you should always prioritize repayment of accounts where property is tied to repayment of the loan. If you don’t or you can’t afford to pay, you risk losing the property altogether.

Personal Loans

Personal loans are often a gauge from lenders to see how you can handle no strings attached money. And that’s basically what personal loans are: no strings attached money. You can use the money for whatever you like but it usually comes at the cost of a high interest rate. Personal loans are unsecured and therefore do not take as high a priority as secured accounts, however we still want to pay whatever we can when we are at risk of defaulting. But if it’s between choosing to pay a personal loan or a secured debt, you should always look towards paying a secure loan first.

Credit Cards

Credit cards just like personal loans are unsecured debts. Unsecured debts do not have a high priority in terms of hierarchy. When your finances start looking grim, credit cards are something you may want to consider holding off from paying until you’ve made your more important accounts whole. That’s not to say that credit card payments aren’t important, they most definitely are! However, they do not take priority over things like your home, your automobile, etc.

Medical Debts

Medical debts have the lowest priority and are often the accounts that are most likely to go unpaid. This is simply due to the fact that medical debts have the least impact to credit and are in large part the most likely to be left unpaid by most Americans. These unpaid debts are very unlikely to get litigated on and have the smallest impact to credit worthiness. Additionally, unpaid medical debts are often ignored by most lenders nowadays.

Every single payment we make towards our debt obligations are important! However, when you find yourself in a financial quandary and push comes to shove and you find yourself having to choose between making a payment on your home or on a store credit card, you should always prioritize the home. Although both are important, when we have to choose one over the other, it’s important to prioritize the mortgage payment.