Personal finance blogs often discuss which technique to use to pay back debt. Generally there are two schools of thoughts, some bloggers prefer the Debt Snowball method where someone will pay down the lowest amount debt first and then roll that minimum payment into the next debt. Then there is a school of thought that you start paying down the debt with the highest interest rate. Each have their pros and cons, however, I think there are two types of debts that should be paid back as soon as possible, regardless of whether the interest rate is high or low or if the balance is high or low.
Debts That Should Take Priority in Debt Repayment
Payday or Personal Loans
The payday or personal loan industry in America is huge and the negatives are often highlighted by almost everyone, however, it is an industry that provides personal loans for bad credit or even personal loans with no credit. Those two segments of the population need access to cash as much as the next person.
Notwithstanding if you agree with whether the industry should be regulated, Wikipedia provides an excellent example as to why the loan should be paid back as soon as possible,
Due to the extremely short-term nature of payday loans, the difference between APR and effective annual rate (EAR) can be substantial, because EAR takes compounding into account. For a $15 charge on a $100 2-week payday loan, the APR is 26 × 15% = 390% but the EAR is (1.1526 − 1) × 100% = 3,685%. Careful reporting of whether EAR or APR is quoted is necessary to make meaningful comparisons.
401(k) Loans
The two main advantages of a 401(k) loan is that the interest rate is usually low as compared to alternatives and a majority of the interest is being paid back to you. Sounds fantastic right? However, if you were to lose your job you have 60 days to pay the loan back, in full. Due to this type of job risk, I would recommend paying back this type of loan back as soon as possible.
