Which Loan Should I Pay Off First? The Complete Debt Prioritisation Guide

When juggling multiple loans and debts, one of the most crucial financial decisions you’ll face is determining which loan should I pay off first. With the average UK household carrying £15,400 in unsecured debt, understanding how to prioritise your repayments can save you thousands of pounds and years of financial stress. This comprehensive guide will provide you with a clear, actionable strategy for tackling your debts in the most efficient order possible.

Understanding Your Debt Landscape: The Foundation for Smart Prioritisation

Before determining which loan you should pay off first, it’s essential to create a complete picture of your financial obligations. Many people underestimate the true cost and impact of their various debts, leading to suboptimal repayment strategies.

Creating Your Debt Inventory

The first step in answering “which loan should I pay off first” is cataloguing all your debts with these key details:

Essential Information for Each Debt:

Outstanding balance
Interest rate (APR)
Minimum monthly payment
Repayment term remaining
Type of interest (fixed or variable)
Any penalties for early repayment
Tax implications of repayment

Common UK Debt Types to Include:

Credit cards
Personal loans
Student loans
Mortgage
Car finance
Overdrafts
Store cards
Payday loans
Family loans
HMRC tax debts

Calculating the True Cost of Each Debt

Understanding which loan to pay off first requires looking beyond just interest rates. Consider these factors:

Total Interest Cost Calculate how much interest you’ll pay over the life of each loan at current payment levels. This often reveals surprising disparities between seemingly similar debts.

Compound Interest Impact Credit cards and revolving credit facilities compound interest monthly, whilst some personal loans use simple interest calculations. This difference significantly affects prioritisation decisions.

Opportunity Cost Consider what else you could do with the money currently going toward minimum payments. Higher monthly commitments tie up cash flow that could be used for investments or emergency funds.

The Two Primary Debt Repayment Strategies

When deciding which loan should I pay off first, most financial experts recommend one of two proven approaches: the Debt Avalanche or the Debt Snowball method.

The Debt Avalanche Method: Mathematical Optimisation

The Debt Avalanche method prioritises debts by interest rate, tackling the highest-rate debt first while maintaining minimum payments on others.

How It Works:

List all debts by interest rate (highest to lowest)
Pay minimums on all debts
Put any extra money toward the highest-interest debt
Once paid off, redirect that payment to the next highest-rate debt
Repeat until all debts are eliminated

Example Debt Avalanche Prioritisation:

Store card: £1,500 at 29.9% APR
Credit card: £3,200 at 24.9% APR
Personal loan: £8,000 at 12.9% APR
Car finance: £15,000 at 6.9% APR
Student loan: £25,000 at 6.3% APR

Advantages of the Avalanche Method:

Mathematically optimal approach
Minimises total interest paid
Fastest path to debt freedom
Most cost-effective strategy

Potential Drawbacks:

Can feel slow if highest-rate debt has large balance
Requires strong motivation and discipline
May not provide early psychological wins

The Debt Snowball Method: Psychological Motivation

The Debt Snowball method prioritises debts by balance size, starting with the smallest debt regardless of interest rate.

How It Works:

List all debts by balance (smallest to largest)
Pay minimums on all debts
Put any extra money toward the smallest debt
Once paid off, redirect that payment to the next smallest debt
Continue until all debts are eliminated

Example Debt Snowball Prioritisation:

Store card: £1,500 at 29.9% APR
Credit card: £3,200 at 24.9% APR
Personal loan: £8,000 at 12.9% APR
Car finance: £15,000 at 6.9% APR
Student loan: £25,000 at 6.3% APR

Advantages of the Snowball Method:

Provides quick psychological wins
Builds momentum and motivation
Simplifies financial management over time
Easier to maintain long-term

Potential Drawbacks:

May cost more in total interest
Not mathematically optimal
Could extend overall repayment timeline

Which Loan Should I Pay Off First? A Prioritisation Framework

Beyond the avalanche and snowball methods, certain debt types warrant special consideration when determining which loan you should pay off first.

Tier 1: Emergency Priority Debts

These debts should always be addressed first, regardless of interest rate or balance:

HMRC Tax Debts

Potential consequences: Bailiff action, frozen bank accounts
Interest rates: Often high and compounding
Legal implications: Criminal prosecution possible
Action: Contact HMRC immediately to arrange payment plan

Secured Debt Arrears (Mortgage, Car Finance)

Risk: Repossession of secured asset
Credit impact: Severe and long-lasting damage
Legal consequences: Court action and forced sale
Action: Prioritise immediately and seek debt advice

Court-Ordered Debts

Failure to pay can result in imprisonment
Bailiff enforcement highly likely
No negotiation flexibility
Action: Must be prioritised above all other debts

Payday Loans

Extremely high interest rates (often 400%+ APR)
Aggressive collection practices
Rapid escalation of costs
Action: Pay off immediately, even if it requires borrowing elsewhere

Tier 2: High-Priority Consumer Debts

These debts typically warrant early attention in your repayment strategy:

Credit Cards with High Balances Credit cards often represent the highest-cost debt in most portfolios. When determining which loan to pay off first, consider:

Interest rates typically 15-30% APR
Compound monthly, making balances grow rapidly
Minimum payments often barely cover interest
Significant improvement to credit score when paid off

Store Cards and Retail Finance

Often carry the highest interest rates (25-35% APR)
Usually smaller balances, making them good snowball candidates
Limited consumer protections compared to regulated credit

Overdrafts Recent regulatory changes have made overdrafts more expensive:

Interest rates now typically 35-40% APR
Daily fees replaced with annual percentage rates
Can trigger additional charges and credit score damage
Strategy: Prioritise clearing persistent overdraft usage

Tier 3: Moderate Priority Debts

Personal Loans Personal loans often fall into the middle priority range because:

Fixed interest rates provide predictability
Set repayment schedules with defined end dates
Interest rates typically 3-15% APR
Early repayment may incur charges (check terms)

Hire Purchase and Car Finance

Secured against the vehicle
Moderate interest rates (3-12% APR)
Potential early repayment penalties
Consider vehicle depreciation versus loan balance

Tier 4: Lower Priority Debts

Student Loans UK student loans often rank lower in prioritisation because:

Income-contingent repayment terms
Relatively low interest rates
Potential for loan forgiveness
Payments automatically adjust with income changes

Low-Interest Personal Loans

Loans below 5% APR may be deprioritised
Consider alternative investment opportunities
Maintain good credit relationships with lenders

Family Loans

Typically no formal interest charges
Flexible repayment terms
Consider relationship implications
Address when financially comfortable to do so

Special Considerations When Deciding Which Loan to Pay Off First

Interest Rate vs. Payment Flexibility

Sometimes a lower-interest debt might warrant priority due to payment inflexibility:

Fixed vs. Variable Rates

Variable rates may increase, changing your prioritisation
Fixed rates provide certainty for planning purposes
Consider interest rate trends and economic outlook

Payment Flexibility Some loans offer features that affect prioritisation decisions:

Payment holidays during financial hardship
Ability to reduce payments temporarily
Options for term extensions

Tax Implications of Debt Repayment

Understanding tax implications helps determine which loan you should pay off first:

Tax-Deductible Interest

Buy-to-let mortgage interest can be offset against rental income
Business loans may offer tax advantages
Student loan interest isn’t tax-deductible but repayments are automatic

Capital Gains Implications

Early property loan repayment might free up funds for investment
Consider timing of investments and tax year implications

Credit Score Impact

Different debts affect your credit score differently when paid off:

High Credit Utilisation

Credit cards above 30% of limit significantly impact scores
Paying down credit cards provides immediate score improvement
Store cards often have low limits, making utilisation ratios high

Account Closure Effects

Closing oldest accounts can reduce average account age
Keep old credit cards open with zero balances
Personal loans close automatically when paid off

Regional and International Considerations

Scotland-Specific Debt Laws

Scottish residents face different legal frameworks:

Trust deeds instead of Individual Voluntary Arrangements (IVAs)
Different bankruptcy procedures (sequestration)
Unique debt advice services available

Northern Ireland Variations

Different court systems for debt recovery
Specific local debt advice services
Potential variations in collection practices

International Readers: Adapting the Framework

United States

Federal student loans offer different repayment options
Medical debt considerations not relevant in UK
State-specific collection laws vary

Canada

Provincial student loan programs differ from UK system
Different tax implications for debt repayment
Unique secured debt protections

European Union

Consumer protection laws may offer different options
Cross-border debt collection considerations
Currency fluctuation impacts for multi-currency debts

Advanced Strategies: Beyond Basic Prioritisation

The Debt Hybrid Approach

Many financial advisors now recommend combining avalanche and snowball methods:

Modified Avalanche

Use avalanche method as primary strategy
Make exceptions for small, high-stress debts
Address psychological barriers while maintaining mathematical efficiency

Balanced Approach

Split extra payment capacity between highest-rate and smallest debts
Provides both financial efficiency and psychological motivation
Adjust ratio based on personal preference and circumstances

Seasonal and Windfall Strategies

Bonus and Windfall Management When receiving unexpected money, consider this prioritisation:

Emergency fund (if not established)
Tier 1 priority debts
Highest-interest remaining debts
Investment opportunities if debt interest rates are low

Tax Refund Optimisation Use tax refunds strategically:

Larger refunds: Split between emergency fund and debt repayment
Smaller refunds: Apply entirely to highest-priority debt
Consider adjusting tax withholding to increase monthly cash flow

Balance Transfer and Consolidation Considerations

When Consolidation Makes Sense

Multiple high-interest debts can be simplified
Lower combined interest rate achievable
Monthly payment reduction needed for cash flow

Balance Transfer Strategy

Use 0% promotional rates strategically
Calculate total cost including transfer fees
Ensure ability to repay before promotional rate expires

Debt Consolidation Loans

Fixed interest rates provide payment certainty
Longer terms reduce monthly payments but increase total interest
Prevents accumulation of additional credit card debt

Technology Tools for Debt Prioritisation

Debt Tracking Applications

Free UK Options:

MoneySavingExpert debt help tools
Citizens Advice debt calculator
StepChange online debt tool

Paid Applications:

YNAB (You Need A Budget): Comprehensive debt and budget tracking
Mint (limited UK functionality): Basic debt overview
PocketGuard: Simplified debt prioritisation

Spreadsheet Templates

Essential Features for DIY Tracking:

Automatic interest calculations
Payment scenario modelling
Progress tracking and motivation charts
Debt-free date projections

Professional Debt Advice Services

Free UK Services:

StepChange Debt Charity
Citizens Advice
PayPlan
Christians Against Poverty

When to Seek Professional Help:

Total debts exceed annual income
Unable to meet minimum payments
Considering formal debt solutions (IVA, bankruptcy)
Complex debt situations with multiple secured debts

Creating Your Personal Debt Repayment Plan

Step 1: Complete Debt Assessment

Use this comprehensive checklist to evaluate which loan you should pay off first:

Debt Information Gathering

List all debts with current balances
Confirm interest rates and terms
Calculate minimum monthly payments
Identify any early repayment penalties
Note secured vs. unsecured debt status

Financial Capacity Assessment

Calculate total monthly income
List all essential expenses
Determine available debt repayment funds
Establish emergency fund target (if none exists)

Step 2: Apply Prioritisation Framework

Emergency Assessment

Address any Tier 1 emergency debts immediately
Contact creditors for payment arrangements if needed
Seek professional advice for complex situations

Strategy Selection Choose your primary approach:

Debt Avalanche (mathematically optimal)
Debt Snowball (psychologically motivating)
Hybrid approach (balanced strategy)

Step 3: Implementation and Monitoring

Monthly Review Process

Track payment progress against targets
Adjust strategy for income or expense changes
Celebrate milestones to maintain motivation
Reassess prioritisation as debts are eliminated

Quarterly Strategic Review

Evaluate effectiveness of chosen strategy
Consider refinancing or consolidation opportunities
Update emergency fund targets
Plan for seasonal income variations

Common Mistakes to Avoid When Prioritising Debt Repayment

1. Ignoring Small High-Interest Debts

Many people focus on large balances while ignoring smaller, high-interest debts that compound rapidly. A £500 store card at 29.9% APR costs more over time than a £2,000 personal loan at 8% APR.

2. Paying Only Minimums Across All Debts

Without targeting extra payments toward priority debts, you’ll extend repayment timelines significantly. The mathematical difference between minimum payments and strategic prioritisation can be tens of thousands of pounds.

3. Closing Credit Cards Too Quickly

Closing credit accounts immediately after paying them off can negatively impact credit scores. Keep old accounts open with zero balances to maintain credit history length and available credit ratios.

4. Neglecting Emergency Funds

Aggressively paying down debt without maintaining emergency reserves often leads to accumulating new debt when unexpected expenses arise. Maintain at least £1,000 emergency fund during debt repayment.

5. Ignoring Secured Debt Risks

Prioritising unsecured debt over secured debt arrears can result in asset repossession. Always address mortgage or car finance arrears before focusing on credit cards or personal loans.

6. Failing to Negotiate

Many creditors offer hardship programs, reduced settlement amounts, or improved terms. Always contact lenders before missing payments or accumulating significant arrears.

The Psychology of Debt Repayment: Maintaining Motivation

Building Sustainable Habits

Visual Progress Tracking

Create charts showing debt reduction progress
Use apps that gamify the repayment process
Set and celebrate intermediate milestones

Accountability Systems

Share goals with trusted friends or family
Join online debt repayment communities
Consider working with a financial coach

Reward Systems

Plan small celebrations for major milestones
Budget modest rewards for staying on track
Visualise life after debt freedom

Overcoming Setbacks

When Plans Don’t Work

Reassess strategy rather than abandoning goals
Consider whether avalanche vs. snowball better fits your personality
Seek professional advice if struggling consistently

Dealing with New Debt If you must take on new debt during repayment:

Integrate it into your existing prioritisation system
Reassess which loan should be paid off first
Consider whether the new debt warrants immediate priority

Long-Term Financial Planning Beyond Debt Repayment

Preparing for Life After Debt

Redirecting Debt Payments Once debts are eliminated, redirect payments toward:

Emergency fund expansion (3-6 months’ expenses)
Retirement savings and pensions
Investment opportunities
Major purchase savings (house deposits, etc.)

Credit Rebuilding Strategy

Maintain small balances on 1-2 credit cards
Use credit responsibly to demonstrate good payment history
Monitor credit reports regularly for accuracy
Consider credit-building products if scores need improvement

Preventing Future Debt Accumulation

Budget Maintenance

Continue using budgeting systems that worked during debt repayment
Regular financial reviews to catch overspending early
Maintain awareness of spending triggers and emotional spending patterns

Emergency Fund Importance

Build emergency funds to prevent future debt accumulation
Consider keeping emergency funds in easily accessible accounts
Regularly reassess emergency fund adequacy as lifestyle changes

Industry Changes Affecting Debt Prioritisation

Recent Regulatory Changes

FCA Overdraft Reforms Recent changes have made overdrafts significantly more expensive, often pushing them up the prioritisation list for many borrowers.

Credit Card Regulation Updates New rules require clearer disclosure of costs and provide better protection for persistent debt customers, affecting prioritisation strategies.

Payday Loan Restrictions Stricter regulation has reduced some payday loan abuses, but these products remain extremely expensive and high-priority for repayment.

Economic Factors Affecting Strategy

Interest Rate Environment

Rising base rates affect variable-rate debts
Fixed-rate debts become relatively more attractive
Refinancing opportunities may change debt priorities

Inflation Impact

High inflation reduces the real burden of fixed-rate debt
Variable-rate debts become increasingly expensive
Emergency fund requirements increase with inflation

Conclusion: Mastering Your Debt Prioritisation Strategy

Determining which loan should I pay off first requires balancing mathematical optimisation with psychological sustainability and personal circumstances. While the debt avalanche method offers the most cost-effective approach, the debt snowball method provides crucial psychological benefits that help many people maintain long-term success.

Key takeaways for successful debt prioritisation:

Always address emergency-priority debts first – tax debts, secured debt arrears, and payday loans require immediate attention regardless of other factors
Choose a sustainable strategy – whether avalanche, snowball, or hybrid approaches, consistency matters more than perfection
Consider your personality – honest self-assessment of what motivates you leads to better long-term outcomes
Regular reassessment is crucial – circumstances change, interest rates fluctuate, and strategies should adapt accordingly
Professional advice has value – complex debt situations benefit from expert guidance, especially when considering formal debt solutions
Emergency funds prevent backsliding – maintaining reserves reduces the likelihood of accumulating new debt during repayment

The question “which loan should I pay off first” doesn’t have a universal answer, but following the frameworks and strategies outlined in this guide will help you make informed decisions that align with your financial goals and personal circumstances. Remember that debt repayment is a marathon, not a sprint, and sustainable progress toward financial freedom is more valuable than unsustainable aggressive tactics that lead to burnout or failure.

By taking control of your debt prioritisation strategy, you’re taking a crucial step toward financial independence and peace of mind. Whether you choose to tackle your highest-interest debts first or build momentum with smaller balances, the most important decision is to start with a clear, informed plan that you can maintain over the months and years ahead.