At a Glance
When thinking about how to use extra money to manage debt, it's important to understand how different types of borrowing work. Credit cards often carry higher interest rates than personal loans, which means they can become more expensive over time if not repaid. However, making additional payments on loans can also reduce the total interest paid and shorten the loan term.
The most suitable approach will depend on a range of factors, including your interest rates, types of debt, and personal financial goals. Some people choose to combine strategies to help manage short-term costs while working toward long-term debt reduction.
Overpaying Loans vs Clearing Credit Card Debt
It can be challenging to decide where to direct extra payments when you’re managing different types of debt. A common question is whether to reduce credit card balances first or make additional payments on a loan.
Each option has potential benefits depending on your circumstances. Key factors to consider include the type of debt, interest rates, repayment terms, and what you’re aiming to achieve financially.
Credit cards typically carry higher interest rates than loans, which means that unpaid balances can grow quickly if only minimum payments are made. In contrast, loans often have lower interest rates and fixed repayment schedules, which may offer more predictability.
Making additional loan payments could reduce the total interest paid over time and help repay the loan earlier, but this depends on your lender’s terms and your specific situation.
This article explores key considerations to help you think through your options more clearly.
Understanding Credit Card Interest
Credit card debt is generally considered more expensive than other forms of borrowing because of its higher interest rates. In the UK, credit card APRs often exceed 20%, compared to many personal loans, which may have rates between 6% and 10%, although this can vary depending on the lender and borrower profile.
Because of this, credit card balances may increase more rapidly than loans if not actively managed. Reducing or clearing these balances can help prevent interest from compounding, but the right approach will vary from person to person.
In some cases, individuals may also choose to focus on other debts if those carry higher interest rates or less flexibility.
The Potential Impact of Overpaying a Loan
Overpaying a loan means making payments above the required monthly amount. This may reduce the overall interest paid over the lifetime of the loan and could shorten the repayment period, depending on the terms agreed with the lender.
Some lenders apply early repayment charges, while others, such as Salad, allow early repayment without penalties. It's important to check the terms of your loan before making any extra payments.
Even small additional payments can, over time, contribute to reducing your outstanding balance. Whether this approach suits your needs depends on your broader financial situation and goals.
Looking at Your Overall Debt Mix
When considering how to allocate extra funds toward debt, it can help to look at the full picture of what you owe. Understanding the interest rates, balances, and repayment terms across your debts can help you make an informed decision.
For example, if one of your debts has a significantly higher interest rate, that might influence your priorities. Similarly, if you value flexibility, reducing credit card balances may free up available credit in case of emergencies.
There’s no one-size-fits-all approach, but reviewing your full debt profile and how each type of debt affects your financial position may help you find a strategy that aligns with your needs.
Balancing Short-Term and Long-Term Considerations
Deciding where to allocate extra money may involve weighing short-term relief against longer-term financial benefits.
Some people prefer to reduce high-interest debts, such as credit cards, to ease immediate financial pressure. Others focus on reducing loan balances to bring down the total cost of borrowing over time.
It’s also possible to take a blended approach, for example, allocating most extra payments to credit cards while occasionally choosing to overpay loans. This can offer both immediate and longer-term benefits, depending on how your debts are structured.
Approaches That Some People Use
There are various debt repayment strategies that borrowers use to manage their repayments, such as:
Debt Avalanche Method: Focusing on debts with the highest interest rate first, while maintaining minimum payments on others.
Debt Snowball Method: Paying off the smallest balance first to create a sense of progress, then moving on to larger debts.
Split Strategy: Allocating a portion of extra payments to different debts based on individual priorities.
These methods aren’t one-size-fits-all, but they can be helpful frameworks when deciding how to manage repayments. It's worth considering which approach may align best with your financial habits, goals, and circumstances.
For a Loan With No Early Repayment Fees, Choose Salad
At Salad, we make fair loan options available for almost every employed UK resident.
As one of the largest CDFI consumer lenders in the UK, we understand that the credit score system isn’t always fair. That’s why we use an Open Banking-based assessment to evaluate the financial situation of every applicant to judge affordability based on your unique circumstances.
Applying for one of our new loans doesn’t impact your credit score. We use Open Banking in our initial assessment. If successful, we report your loan to the CRA’s (Credit Reference Agencies). Your credit score won’t hold you back from being eligible.
To learn more about our personal loans, click here and to read more blogs like this one, visit our blog page now.
Final Thoughts
There’s no universally correct answer to whether you should overpay loans or clear credit card balances first. The most suitable path will depend on your interest rates, lender terms, available income, and financial goals.
By understanding how different types of debt behave and thinking about what matters most to you, you’ll be in a better position to make decisions that work for you.
Disclaimer
This article is for general information only and does not constitute personal financial advice. It does not take into account your individual circumstances. If you're unsure about your financial situation or the right approach for you, consider speaking with an independent financial adviser. Salad Loans is authorised and regulated by the Financial Conduct Authority. Early repayment terms and eligibility criteria apply.
