Priority debts

Not all debts are equal. It’s important to figure out how each of your debts affects your budget. For example, what would happen if you missed payments? So if you dream of being debt-free, or at least need to reduce your overall debt burden, the best way to start is to pick which debts to pay off first. But how do you do that? 

Look at the interest rate on borrowing, often called the APR or the annual percentage rate. All loans will charge an interest rate, which is the cost of borrowing. It’s calculated as the percentage paid back on every pound borrowed. APR shows you the yearly cost of borrowing, including interest and fees. For example, a 5% APR means you pay an additional 5% interest each year on the loan until it’s repaid. 

Before you borrow, check the APR and any fees and then ask yourself, am I really comfortable with the repayments? Know the consequences of late payment for each of your debts. This will help you to choose which demands your attention. 

We can put debts into two categories: priority or non-priority debts. Priority debts are ones where non-payment has serious consequences like eviction, being taken to court, action from bailiffs. These may be what is referred to as secured loans. They’re backed by an asset (called collateral) that the lender can take if you fail to repay the loan. The loan may be tied to a house or car, for example. We know this is scary, but you have to deal with these debts before anything else. This isn’t always about the amount of money involved.

Owing two months’ rent at £1,000 is more of a priority than a far bigger credit card debt because you risk eviction or homelessness. If you have bought your home with a mortgage, that’s probably the biggest loan you’ll ever take out. The debt will be secured against your home, so falling behind on your monthly payments could lead to it being repossessed by your lender. If you ever find yourself in a situation where you’re unable to pay priority debts, please contact your bank, they are required to work with you. Support is available and they will be able to help you plan ahead. Don’t hesitate to reach out to debt support agencies and charities for extra support.

So secured loans mean that if you don’t pay, the lender can take back whatever you use to secure the loan. By contrast, non-priority debts are ones where the lender doesn’t have additional powers to do things like cut off utilities or evict you. These include things like overdrafts, money borrowed from family, credit card or store card debt and unsecured personal loans, where you’ve not borrowed against anything you own like your car.

These should be cleared once you have a handle on your priority debts. The consequences of not keeping up with payments for non-priority debts might seem less severe in the short term, but can have a damaging impact on your financial decisions in the long run. These should not be avoided and need to be tackled. When you have got an idea of which debts are which, you’ll need to make a plan and stick to it. We will help you with some suggestions in our video on making a payment plan.