Pay Now or Pay Later?

If you’re like many people, one of your New Years resolutions may focus on paying off your outstanding debts. But before you strain your budget writing bigger checks at bill time each month, it helps to make a plan to pay down your debts. Generally speaking, a lower interest rate means you can take longer to pay down a debt without it being a burden. Take a look at these five common types of debt, and make a smart plan to pay what you owe.

Mortgage. If a large windfall of cash comes crashing into your lap, then by all means, pay off your mortgage early. Otherwise, it’s usually best to prioritize other things like retirement savings and college planning over your monthly house payment.

Credit card balances. Credit card debt can be the most damaging form of debt for many Americans. If your have zero-interest cards, you can put those payments on low priority for now while you focus on the higher-interest cards. But get them all paid off as soon as possible. Those zero-interest introductory periods don’t last forever.

Student loans. Student loans typically carry low interest rates and have long repayment terms. Also, the great thing about student loans is that most lenders offer great programs to help you manage your payments if you experience unemployment or some other budget crisis. You usually can’t say the same for your car payment or mortgage. In most cases, there is no need to rush to pay off these balances.

Car loans. Unless you got lucky with a zero-interest or very low-interest auto deal, your car payment will cost you thousands over the term of the loan. Pay this one off early, but only if you can. Credit card debt is still more important.

Car insurance premiums. When you make monthly payments on your car insurance premiums, you’re usually being charged between 5 and 9 dollars each month for installment fees. This isn’t the worst budget-killer ever, but it’s still unnecessary. Purchase 6 or 12 months of car insurance ahead of time, and you can save a bit of money.

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