Which to pay off – loans or credit card balance?

Many different people have multiple lines of credit for a whole range of reasons. They might have taken out a loan for a home extension and then another for a holiday whilst they are still paying off the remainder of the first. At the very least, a lot of people have a mortgage and then some additional form of borrowing.

When paying back these finances it can often be a dilemma which to pay off first – which line of credit should be your priority. The prioritisation is basic financial planning and really depends on the APR rate of your various finances, the flexibility the lines of credit have in paying off the credit early etc.

Here are some points to keep in mind when deciding / looking at your finances:

Can you pay back your loan early? – if you have a loan, some companies will not allow it to be paid back any faster than previously arranged. If paying off early they might charge you some form of redemption penalty, purely because they will be missing out on the interest payments, therefore have to make up for this. Read the small print of your agreement or perhaps contact the loan company if you are unsure.

Flexible Mortgages and Payment holidays – do you have a flexible mortgage? Can you take payment holidays? It is certainly worth finding out. If you can, there could be potential to save money be instead focusing the money which would have paid off your mortgage that month to paying off another line of credit which has a higher APR rate.

Look at the figures – ultimately the decision on which finance to pay off first will be which is costing you more? If you have a car loan at eight percent APR, and a credit card at twelve percent APR, then clearly it would be better to pay off the credit card balance.

Whilst loans can certainly vary on their interest rates, (secured loans are generally at lower rates than tenant loans due to the decreased ‘risk’ in recovering money for the lender) typically credit card interest rates are higher than loan interest rates. However if you have an introductory offer on a credit card this will, of course, become a factor. Therefore the credit card balance should ideally be paid off fairly promptly.

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