Business Insider: “What it means when financial planners say you should pay off ‘high-interest debt’ before saving”
September 15, 2020 — In today’s issue of Business Insider, we learn: Financial planners often recommend paying off “high-interest debt” before saving or focusing on other financial priorities. But which debts should you pay off before saving, and which can you continue to pay while you save? Some experts say any loan above student loan or mortgage interest rates is high-interest debt, a range of about 2% to 6%. Things like personal loans and credit card debts have much higher interest rates, ranging from 9% to 20% or more. To determine whether your debt is high-interest, it might be worth comparing the interest rate to how much it could earn if it was invested.
Marguerita Cheng of Blue Ocean Wealth Management explains: “Some folks say that any debt in double digits is expensive debt. Others say anything above student loan or mortgage debt [is high-interest].
- Mortgages tend to have interest rates around 3%. Student loan interest rates can be slightly higher — for the 2020 to 2021 school year, federal student loan interest rates will range from 2.75% to 5.3%.
- Credit card and other unsecured loan debt tends to have interest rates higher. The average personal loan interest rate is 9.63%, while the average credit card has a 14.52% interest rate.
Comparing interest rates on credit cards and personal loans to necessary debt like student loans or mortgages can help put debt into perspective.