When it comes to managing their finances, every individual has different priorities. Some might want to save for a holiday or invest for future benefits, while others may want to settle their debts. With so many financial goals in mind, it is not easy to prioritize them. However, before you plan to save for a holiday or invest for future gains, you must prioritize settling your debts. You can get in touch with Debt Advice Expert London
Paying off your debts involves settling your unsecured debts such as credit cards, overdrafts, and store cards instead of secured ones, which include mortgages or car loans. Secured debts have a lower interest rate than unsecured loans as these loans are secured against collateral. If you fail to make payments, the creditor may repossess your home or car to cover the outstanding debt.
On the other hand, unsecured debts have a higher interest rate. They can significantly affect your credit rating than secured debts. Henceforth, settling your unsecured debts must be your priority rather than saving or investment.
Why should I repay my debt instead of saving?
Generally, unsecured debts have a high rate of interest. Interest is the amount you pay to the creditor in exchange for the sum borrowed from them. The longer you take to repay the debt, the higher the interest amount. Therefore, unsecured loans can put a strain on your finances.
On the other hand, savings have a lower interest rate, and the money you get via savings is less when compared to the interest you’ll have to pay on your debts. Thus, prioritizing your debts before putting aside money for savings is a viable option.
For instance, if you spent £600 on a credit card at a 12% interest rate, your debt would be £72. Now, let’s assume that you got an incentive of £500. What would you do- pay your debts or deposit the money into your savings account?
With the interest rate of 1% on cash savings, you’ll have £606 in your savings account. So, by putting aside the money as savings, you’ll only earn £6. However, you still have a £72 credit card debt on your head. You’ll be in a better financial position when you prioritize paying your credit card debt before saving.
Should I always prioritize paying my debts?
There are several kinds of unsecured debts, such as zero-interest debt and debts with high early repayment charges that you might not be willing to pay initially.
If you have a debt with a 0% interest rate, you might be least bothered to pay these debts on a priority basis. However, the interest periods on these debts are introductory, so make sure you pay these debts before the introductory period ends.
Debts with high repayment fees
Some creditors may charge you early repayment fees in their contract when they lend you money. This signifies that they can charge you fees if you settle your debts before the agreed time. However, you may end up paying more if you repay your debt early. So, you must continue making payments as agreed.
What should be my priority after I settle my debts?
Once you become debt-free, you can begin your future planning. But, it’s good to have emergency savings before planning your future. You can utilize these emergency savings for unanticipated events. Once you have a good amount of emergency savings, you can begin planning for your future ahead.
If you fail to repay your debt and keep borrowing more money, you’re sure to expect a downfall in your credit score. Therefore, you must get rid of your debts as soon as possible. Debts Advice is here to help you get the best support and guidance to help you repay your debts in the shortest possible time. Begin your journey to a debt-free future with us today.