In the previous post of this mini-series we talked about the general concept of clearing your debts before you begin to invest. You can review that here:
Before you begin to invest – step 1.

In this post, we get more specific…

If you have just one loan then you can just pay it off steadily. But what if you have more than one loan – what should you do ?

You may not have the means to chip away at all of your loans at the same time with the same monthly repayment. So you need to determine a priority or an order in which to clear your debts. Here is one way you can do this:

If you take a look at your loan agreement documents, you will see that you are required to pay interest for as long as you hold the loan until every dollar or pound has been paid back.

What you need to do in order to determine which loan to payback first is list them in order of interest rate.
In simple terms the loan with the highest rate will cost you more in terms of paying interest.

For example, imagine if you had 3 loans (debt) as follows:

• Credit card debt with an interest rate of 19% per year.

• Car loan with an interest rate of 11% per year.

• Home improvement loan with an interest rate of 5% per year.

If the terms and conditions of these loans are the same and there are no additional costs, then this is how much interest you will pay each year for every $1000 left outstanding..

• Credit card debt at 19% = $190 interest cost per year for every $1000.

• Car loan at 11% = $110 interest cost per year for every $1000.

• Home improvement at 5% = $50 interest cost per year for every $1000.

The credit card debt is costing you more in terms of interest than the car loan. The car loan is costing you more interest than the home improvement loan.

Therefore, to save on future interest costs in the most efficient way, you should consider paying back the credit card debt with the high interest rate before the other two loans which have lower interest rates.

The quicker you can pay back high interest loans, the quicker you will clear your debts and the sooner you will be in a position to start investing.