Who To Pay First When You Owe Money

By Author: Susanna Berlatsky
Total Articles: 7
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Once you go into debt, getting out of it can be very hard. The primary factors making it hard are all the penalties you incur as a cost of being behind in your bills. You'll find that it's harder to get credit. If you do get credit, you'll pay a greater loan interest for it. In addition, late fees do nothing but add debt onto your already mounting bills. You're constantly harassed by lenders threatening legal action if you don't pay. But you can't afford to pay all of your loans, so which ones do you choose first?

When a lender loans you money against an asset, the understanding is that if you are unable to repay the loan, for any reason, then the lender will assume ownership of that asset. In lending arrangements, this kind of loan is referred to as a secured loan or an asset loan, and the asset that you put up is referred to as collateral. This way the lender ensures that you will have a strong inducement to pay back the borrowed money. Once you have paid off the loan, however, the lender no longer has any claims to your property.

If you borrow money and you don't put up assets as collateral, you have made an ...
... unsecured loan. In this instance, if you don't repay the loan, the borrower cannot legally take any of your assets. If he wants his money back, his only legal choices are to take you to court for the borrowed money or to continually harass you until you repay the loan.

Most people, will feel obligated to first pay off the loan from whomever they are receiving the most pressure from. But, in most cases that would be a very bad mistake. If you are deep into debt and are having trouble paying off your loans, in the majority of cases you should pay off the secured loans first. Lenders that have given you a secured loan know that if you don't pay your debt they can simply take your collateral.

As an example, if you have an unsecured loan, your lenders will have an unusually hard time and limited means of getting their funds back. The most pervasive kinds of unsecured loans are credit cards. When a company issues you a credit card, they issue it base on strength of your credit alone. No assets are involved. If you miss a credit card payment, you are penalized with a late fee which is added on to your next credit card statement. But you don't lose any of your assets. If you miss too many payments, the credit card company will most likely suspend your credit card but you still haven't loss any assets.

On the other hand, a house or real estate, is one of the biggest types of secured loans that banks offer. They know that if you forfeit your loan payments, they can simply take their property back. So, if you miss more than a few mortgage payments, your mortgage company or lender is likely to start foreclosure proceedings against you that will eventually end up with your eviction and the loss of one of your biggest assets - your home.

An automobile loan is another kind of secured loan. If you miss a few payments on your car, the lending company may repossess the car. And if you need your car to get to work, you could have difficulties earning a living. Again, because of the loss of an asset.

For all of these reasons, all things being equal, if you are behind in payments, you should make payments toward your secured loans first.
Susanna Berlatsky is webmaster and owner of http://www.cardcreditdebtsettlement.com. On her site you'll find articles about how to get out of hopeless debt and other debt related topics.