If you owe money to different lenders then you might be in a position to be able to repay some of them or overpay some of them. If this is the case then it is a great feeling to know that you will be able to get into a position where you will be more in control of your money. However, you will need to decide which loan you are going to repay first. This might seem simple but there are actually quite a few things you should consider to the different approaches that you can take.
The one that is most costly
The option that will gain you the most financially will be to pay off the costliest one first. You might need to do some calculations to work this out. It could be a case of just comparing the interest rates, but do make sure that you do not have other charges as well. You may think that the one with the biggest repayment amounts each month is the dearest, but actually it is the one that has the most charges and interest. It is likely that a mortgage will have a relatively low interest rate but the repayments will be big and something like an overdraft or credit card might have a higher interest rate but the repayments will be small. Therefore, make sure that you are looking at the one that has the highest rates, rather than the one that you pay out the most for each month.
The smallest one
Some people like to get rid of the smallest debt first. This is because they get a good feeling knowing that a loan is gone. So, if they can pay it off and get rid of it they get a psychological boost. This will motivate them to go on and repay the next one. Starting with a bigger one might seem very daunting and they could wonder whether they will ever be able to pay that one off so they want a small target to start with.
The most annoying/stressful one
Sometimes we have a particular loan that really annoys us or stresses us out for some reason. This could be for any reason at all but the idea of getting rid of it could be really motivating. We might feel that we will be prepared to work really hard if we can get rid of that loan and then this might get us into new habits which we can use to help us to repay the other loans that we have afterwards.
The biggest one
You may feel most motivated to repay the largest loan first. You might feel that if you can clear this big debt then you will feel so much freer and better knowing that you have got rid of it. Therefore, this might motivate you more than anything else.
It is good to think about what might be most motivating for you. Start by noting down what loans you have and how much you owe on each and what they cost you. Then you will be able to decide properly which you feel you want to repay first. You will know what might motivate you the most and so you can aim for that. It is a good idea to think about what will keep you going. Do remember though, that you can switch between loans, so if you start to repay one and then decide you would rather do another then you can swap between them. Do watch out for early redemption fees though as some lenders will charge a fee if you want to repay their loans early and you need to work out whether it is worth it.