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Long term debt vs short term debt – Which one should be paid off first?

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Which debts should be paid off first – long term debts or short term debts? Explain the reasons.

Short term debts, such as credit cards, usually carry the highest interest rates, and therefore should be paid off first. Long term debts, such as mortgages and automobile loans typically have lower interest rates.

Consider paying off your debts with the smallest balances first. That way you will see results more quickly, which will encourage you to continue to work hard toward your other debts. We all know how frustrating it is to continue making those monthly payments and seeing no progress. But more importantly, once you have one debt paid off, the money you normally put toward it can then be used toward another debt.

For example, say you have three credit cards, one with a balance of $7000 and a minimum monthly payment of $300, one with a balance of $2000 and a minimum monthly payment of $100, and a $500 balance with a minimum monthly payment of $50. If you only make the minimum payments on the highest two balances but pay double on the smallest balance, then when you pay off the $500 debt you will have an extra $100 a month to put toward the $2000 debt. Then when you pay off the $2000 debt, you will have an extra $200 a month to put toward the $7000 debt. Then when you finally have the $7000 debt paid off, you will have an extra $500 a month you can put toward your long term debts.

Sub: #1 posted on Tue, 09/04/2012 - 15:53

Fallen Fallen

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I believe that there is more to the question than "short term, or long term" with reference to paying down debt. It is important to consider the other factors at play here, i.e. interest rates, fees assessed, etc. rather than simply choosing to pay things down based on whether it is long term or short term. The term of the debt comes into play once the fees are worked out.

To explain further in detail, let's consider three types of debt owed by our made up character, Tom Lee. Tom owes a home equity loan, credit card debt, and private student loans. The home equity loan is at 2.5% interest and a balance owed of $60,000. The credit card debt is at 23% and has a balance 13,000, and the student loan is at 8% interest and has a balance of 6,000. Now, if we were to base this solely on the terms of the debts, the longer term would be the home equity loan, followed by the student loan, then the credit card debt at shortest term. Tom might think that paying off the home equity loan first because it is the longest term debt would be the best thing to do. Or, perhaps Tom might think that paying off the student loan would be the best as the balance is the lowest, thinking of the "debt snowball" technique. Unfortunately, Tom would be wrong in both cases.

In this case, we consider interest rates. In 99% of situations, unless you owe payday loans or some other kind of high interest, bad credit loan, credit card debt is what is going to hit you for the most in terms of interest. Therefore, the smartest course of action for most consumers is to pay off credit card debts first and foremost. That does not mean forgoing your mortgages, student loans, or home equity loans. It simply means paying only the minimum on these things and really knocking down your credit card debt. Remember, every cent you pay to your credit card balance, the lower interest you are assessed with the next month. Now many will ask - after Tom pays off his cards, should he take care of the home equity loan, or the student loan?

The answer is the student loan. The student loan is shorter term debt and has a higher interest rate, therefore paying that off will help Tom take care of his higher interest debts and have the psychological reward of paying off the loan. Home equity loans carry very low interest rates, as the loan is secured by the equity in your home. Furthermore, if you have a checking account relationship with the bank offering the home equity loan, they can offer you as much as .5% off the loan's APR if you have the monthly payment deducted from your checking account. It's also important to note that home equity loan monthly payments are generally much lower than your average mortgage rate.

Ultimately, the key in these situations is always to not only consider the 'term' of the debts, but the interest involved. In many cases, the situation is flipped from the example above, such as if Tom owed 40 grand in credit card debt, 10 grand on a home equity loan, and 3 grand on student loans. In that case, most would lose their minds paying off 40 grand in credit card debt and still having the other loans, so tackling the student loan, then the HE loan, then the credit card debt would be the best option. It all depends on a variety of factors and I hope I explained them well for you!

Good luck!

Sub: #2 posted on Wed, 09/05/2012 - 20:36

waffles waffles
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It really depends on the interest rate -- Long term debt usually will have lower interest rates so if the short term has higher interest rates it would be better to pay that off first since it will save money in the long run. You would just be paying more money over to the company over time when you could be done and saving money to pay the next debt after that.

Also, if the interest rates are almost the same -- I would say pay off the long term debt since you will save all those payments over time -- if you can afford to.

Sub: #3 posted on Thu, 09/06/2012 - 13:37

chrissyhen1 chrissyhen1

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I would pay of the short term debts first. You should always trie to get the shorter debts out of the way. Then what money was paid toward the short terms debts could be applied to the long term debts. The extra money could be used to help them get the long terms debts paid off faster. Always do the shortest debts first.

Sub: #4 posted on Mon, 09/10/2012 - 13:22

radufford radufford

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Generally speaking I believe that you should aggressively pay the debt that has the higher interest rate. You should pay as much as you can each payment period to the debt with that high rate and pay what you can ( obviously, at least theminimum ) to the lower one after that. It's like people with a mortgage on their house. If they send an additional hundred or two over their monthly payment they end up saving thousands and knock a few years off of the life of the loan.

Sub: #5 posted on Fri, 09/14/2012 - 04:55

Artn Artn

(Posts: 260 | Credits: )

honestly i believe that both should be paid off first but i would have to say that short term debts should be paid off first since you dont have long to pay on them why not get them paid off first.. Long term debts you have longer to pay on them than you would short term loans therefore it would be easier to pay off short term debts first

Sub: #6 posted on Sun, 09/16/2012 - 09:01

fastlittlechick_69 fastlittlechick_69

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Short term - usually they have higher interest rates, so the interest can accumlate to higher amounts. Also, they are smaller & can give you a sense of accomplishment by paying them off, and then you can put those payments toward the long term debt. When you put those payments toward the long term debt, that starts to pay down faster too.

Sub: #7 posted on Mon, 09/17/2012 - 07:53

cnl514 cnl514

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I feel since there are short terms debts versers long term, clear out the short term debt and then take the monies that you don't pay to your short term debt and apply it to your long term debt to make bigger payments to get it paid off sooner. I am still having problems with debt because I am on SS

Sub: #8 posted on Mon, 09/17/2012 - 14:34

judkinssharon judkinssharon

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Personally I would pay off the short term debt first. To me, short term debt is more likely to be a small monthly payment that won't hurt your pocketbook. Once the short term debt is paid in full, you can apply that money to your long term debt, which would enable you to pay of the long term debt faster. Just my opinion.

Sub: #9 posted on Tue, 09/18/2012 - 12:40

bingonut bingonut

(Posts: 1433 | Credits: )

The short-term debt, because it may be easier to negotiate appropriate plans for the long-term debt such as a mortgage or other loans. Banks are often flexible and offer a variety of programs with manageable interest rates. Credit card debt, for example, can be a real burden and interest rates are very high. I am currently in the process of paying off my credit cards, because they really bog me down. In past years, my husband and I only used credit cards for business travel and vacations. Otherwise, we always paid everything in cash. Personally, I have actually gotten to hate credit cards and will be a happier person when they are all paid off!

Sub: #10 posted on Fri, 09/21/2012 - 12:39

juttakayser juttakayser

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