Prioritizing Debt Paydowns

If you are like most people starting your career, it’s likely that you’re carrying some debt. People often ask what debt they should prioritize paying down. A good place to start is by knowing which debt is the most expensive – i.e. which is charging you the highest interest rate! 

Payday loans are some of the most expensive forms of debt, charging ~$15 – $20 for every $100 borrowed. Since loans can be for different durations, people usually normalize the interest rates to 1 year by calculating the annual percentage rate (“APR”). In the case of payday loans, the APR can be in excess of 300%. You’ll want to build up enough savings so that you have a “rainy day fund” and don’t need to use this high cost debt.

Credit card debt is another form of very expensive debt. The APR on these is typically in the mid-teens percentage. This is another form of debt you’ll want to use sparingly if possible, and when you do need to use it you should prioritize paying it down to avoid the costly interest.

Other forms of debt include student loans and mortgages. For student loans, the federal subsidized loan rate for undergraduates is 2.75%, which is much cheaper than the APR on payday loans and credit cards. Even for unsubsidized graduate loans, the cost is currently 4.30% for students and 5.30% for parents. Note that for student loans there are government forgiveness programs available depending on the field of work you enter. There are also companies now that are willing to refinance your loans at a cheaper rate.

Lastly, mortgage debt is some of the cheapest as it is secured by your home. Current 30 year mortgage rates are under 4% for a primary residence. Mortgage loans are always prepayable so if interest rates decline in the future you can refinance your mortgage to lower your interest rate (your monthly cost), but there are typically fees involved so you must be saving enough to make it worthwhile.