Finance Globe

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Steps to Determine Which Loan to Pay Off First

Steps to Determine Which Loan to Pay Off First

It doesn’t matter if you are a business owner or individual consumer, nothing changes the importance of tackling debt in the appropriate manner.

If you have no debt, this never comes into play. The same holds true if you only have one loan, such as a single credit card.

However, if you find yourself saddled with multiple loans, you’ll need to answer an important question: which loan should I pay off first?

Believe it or not, some business owners never address this question. Instead, they look at it like this: every loan needs to be paid at some point, so it doesn’t matter the order or approach.

While this may be true in an overall sense, there is more to it than that. Your goal is to pay off your loans in an efficient manner, as this will give you the opportunity to maximize cash flow and leverage all available funds.

With so much information and advice on this subject matter, it can be difficult to decide which steps to take. However, remember this: you need to do what’s best for your business and its finances.

Getting started means taking a close look at two numbers associated with every loan:

•    The minimum payment
•    The remaining balance

Once you have these numbers written down, it’s easy to get a high level overview of where your business stands in regards to its debt. You can now answer questions such as:

•    What is the total of your minimum payments every month?
•    What is the total amount of your debt?
•    Which debts can you pay off in the most time efficient manner?

Take these Steps

Now that you have a clear understanding of your situation, there are three basic steps you can take.

1. Review your Debt

As noted above, no two types of debt are the same.

For example, there is a big difference between credit card debt and a loan on a piece of commercial real estate.

Money you borrow to purchase your office space is considered good debt, as this typically boosts your financial situation over the long term. Furthermore, it may provide a variety of tax benefits.

Conversely, bad debt can drag you down. The most common type is credit card debt. This doesn’t improve your financial situation, but instead makes it more difficult to reach your financial goals.

As a general rule of thumb, make it a habit to tackle bad debt first. Once you get this off your books, not only will you feel better about your finances but you can then adjust your plan to focus on good debt.

2. The Biggest Impact

From a money perspective, you need to know where you’ll get the biggest boost. Does it make the most sense to pay off your business credit card debt first? Or maybe you should turn your attention to a personal loan?

While not a hard and fast rule, paying off the debt with the highest rate first is always a good idea. This will save you money on interest, while also allowing you to knock off a minimum payment.

As you attempt to make this decision, you should always come back to this question: which loan can you eliminate with the idea of having the biggest impact on your finances?

3. Consider the Long Term Impact

Eliminating any debt will make you feel good. Even so, this doesn’t mean you should treat all debt in the same manner.

Along with the steps above, make sure you don’t focus so much on the short term that you lose sight of your long term goals.

For example, does it make sense to pay off a loan that has tax benefits? Maybe it does, maybe it doesn’t. You may want to let this type alone for the meantime, instead focusing your attention on high interest debt that brings no benefits to your business.

Conclusion

Most businesses carry some type of debt. Your goal is to not only understand your debt, but to also manage it in an effective manner.

With the advice above, you will find it easier to determine which loan to pay off first. Once you have a plan in place, you can follow through to ensure that you reach your goals and keep your company on stable financial ground. 

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Comments 1

Frank on Friday, 30 June 2017 14:57

Make sure you also consider the interest rate on the loans. You usually should pay off the higher rates first.

Make sure you also consider the interest rate on the loans. You usually should pay off the higher rates first.
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Monday, 14 October 2019

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