So you have realised you have heaps of debts owing to various lenders, including credit card debts, your mortgage, a car loan, other personal debts and the bills just keep on coming in. Not all debts are the same, and some debts are more important than others. Knowing how to prioritise your debts, and which debts to pay first, is so important.

Debts, like most things in life, work under a hierarchy system. And there are debts that are at the top of this hierarchy that must be paid first. Once you work out which of your debts are required to be paid first, and which loans you rank at the lower end of your list, you can focus on making those payments first.

Debts are both secured and unsecured. Secured debt means that your debt is secured against an asset, like your home or home, and if you don’t pay the debt back the lender can take back the asset. Some personal loans and hire-purchase agreements can be secured also. Secured debts are priority debts and should always be paid first.

Another type of debt, which is not unsecured nor secured, but is just as important as secured debt, is debt owed to a Government agency, or debt collected on behalf of a Government agency. This type of debt includes things like tax, child support payments, or court fines. While these debts are not secured, they have priority over unsecured debt.

The other types of debts we commonly have are unsecured debts. These debts are not tied to any assets. There are so many examples of these types of debts:

  • Credit card
  • Store card debt
  • Personal loans
  • Professional bill and accounts from doctors, accountants and lawyers.
  • School fees
  • Utility (i.e. gas, electricity, water) and phone bills
  • Rent
  • Money borrowed from family and friends

Unsecured debt should be paid after your secured debt is paid.

For more information on prioritizing and paying off your debt, see Part Two of this article.