Different Types of Debt & Which to Pay Off First

Whether you’re drowning in debt—or facing a hefty credit card bill—it can seem like the details of your loans don’t really matter. You owe a lot of money, and that’s that. But the reality is more nuanced.

Not only are there good and bad types of debt, each category of debt comes with its own benefits—and challenges. Likewise, each type of debt is unique, whether you have a ton of student loans or a small personal loan.

Understanding these differences can seem intimidating at first, but it’s immensely helpful when choosing a debt payoff strategy. We’ll break down the most common types of debt and walk you through which you should pay off first—and which can stick around.

Main Categories of Debt

In general, there are five major categories of debt:

1. Secured
2. Unsecured
3. Revolving
4. Non-revolving
5. Mortgages

Let’s define each one.

Secured

Secured debt is a loan that’s collateralized by an asset, like your home, car, or bank account. In the case of default, the lender has the ability to seize that asset as a form of repayment for the loan. Because secured debt poses less risk to the lender, these loans often come with lower interest rates than unsecured debt. You’ve likely encountered secured debt in the form of an auto loan, where the dealer can repossess your car if you fail to make on-time payments.

Unsecured

Alternatively, unsecured debt is not collateralized by anything; the borrower is just contractually obligated to repay the debt according to the loan agreement. If you default on an unsecured loan, the lender can report your nonpayment to credit bureaus and take you to court to enforce repayment—but they can’t repossess the new grill you bought with the loan. Credit cards and most personal loans fall into the category of unsecured debt.

Revolving

Revolving credit is a type of debt that borrowers can access—up to a limit—on an as-needed basis. This means you don’t have to pay interest on more than you need at any given time, and you can access the credit again as you pay it off. Minimum payments are made each month based on the portion of the loan the borrower has drawn against. Revolving debt can be either secured or unsecured, with HELOCs and credit cards being the most common examples—respectively.

Non-revolving

On the other hand, non-revolving credit is that which cannot be accessed again after it’s paid off. What’s more, a non-revolving loan is issued as a lump sum—so you have to pay interest on the entire loan amount, not just what you use. This makes it a better option for one-time expenses, rather than costs spread out over a longer period of time (which are better-suited to revolving debt). Personal loans are a common example of non-revolving debt.

Mortgages

Mortgages are the final major category of debt and are typically the largest debt people carry. These loans are used to purchase real estate and are, in turn, secured by that real estate. For that reason, mortgages pose less risk to lenders than unsecured debt, so interest rates are considerably lower than for personal loans and credit cards.

Common Types of Debt

Whether you’re just starting to improve your financial literacy or are already on the path to a debt-free lifestyle, it’s important to approach debt payoff strategically. Here are the most common types of debt you’ll encounter and when you might want to pay them off:

Payday Loans

Payday loans are small, short-term, often high-interest loans. You may have turned to this type of debt if you encountered an emergency or needed to cover monthly bills while waiting for your paycheck. If so, you already know that they typically come with extremely high interest rates.

We recommend exercising caution when considering a payday loan and, if it’s your only option, only choosing a lender with more manageable interest rates (sometimes available between 30% and 50%).

Because payday interest rates are often so much higher than for other forms of debt, this is almost certainly your most expensive debt—even if the monthly payment is lower than for other loans. If you already have a payday loan, don’t panic. Instead, make a plan to pay it off as soon as possible to avoid paying more in interest over the life of the loan.

Credit Cards

Whether issued by a bank or a specific retailer, credit cards can be a great way to cover everything from one off purchases to recurring monthly charges and even emergency expenses. Credit cards are a form of revolving debt because the borrower gets approved for a maximum credit line that they can draw against (and repay) on an as-needed basis.

Credit card APRs typically range between 13% and 30%, with the most qualified borrowers getting access to the most favorable terms. That said, if you pay off your cards in full each month, you won’t have to worry about interest accruing at all.  

However, if you’re like many Americans, you may be facing an average of $6,194 in credit card debt, and this can come with some hefty interest. Regardless of the total balances on your credit cards, we recommend paying them off as soon as possible—and definitely before other debts like your mortgage or student loans.

Personal Loans

Personal loans can come in many shapes and sizes, and it’s important to distinguish between them—especially when deciding how soon to pay them off. When obtained from traditional banks, credit unions, and online lenders, personal loans range from $1,000 to $100,000, and typically come with terms from two to seven years.

These unsecured loans usually have APRs between 5% and 36%. So, while these loans are usually less expensive than credit cards, some may have a higher interest rate—and could come with origination fees factored into repayments. As with other forms of debt, compare the interest rates and outstanding balances to determine which loans to pay off first.

On the other hand, some personal loans are just that—personal. If you borrowed money from friends or family, take this into account when deciding whether to pay them off early. For example, if you borrowed money from your parents with no interest or at a reasonable rate and are more comfortable paying interest to them than to a bank, there’s no need to repay it quickly. Alternatively, if you borrowed money from your brother and it’s causing friction at holidays, you may want to repay it regardless of how favorable the terms are.

Medical Debt

With the high cost of medical care in the U.S., medical debt is a very real concern—even for those with health insurance. Whether you owe a hospital or provider for a hospital stay or other unplanned expense—or are paying back a medical loan for an elective procedure—medical debt can be a huge weight on your shoulders. In fact, it’s estimated that about 32% of working Americans have medical debt, with total debts over $45 billion.

While some medical providers offer in-house financing options, many people turn to personal loans to cover medical expenses. For that reason, interest rates on medical debt tend to start around 3% but can go up to 30% or more. This means that you’ll probably get a rate lower than the average credit card interest rate, but it will likely be higher than for other types of debt like auto loans and mortgages.

When deciding which debts to pay off first, we recommend comparing the balances and interest rates on your medical loans against those of your credit cards and personal loans. If the medical loans are less expensive, consider waiting to pay them off. That said, some people find medical debt more stressful than other loans because it’s a reminder of a difficult time. If this is the case, there’s nothing wrong with paying it off first, even if it has a lower interest rate than some of your other debt.

Auto Loans

If you’re like many people, auto loans are an unavoidable part of your finances. Luckily, traditional car loans are secured so they often come with lower interest rates than personal loans and credit cards. On the low end, car loan APRs can hover around 3%, with some extending up to 20% or more, depending on the borrower’s credit score.

If you need some help negotiating your auto loan, check out our insider’s guide to car buying.

If you have a healthy credit profile and qualified for a low interest rate, it may not make sense to pay off your auto loan early. This is especially true if you have high-interest (or heavily utilized) credit cards that you can pay off first. However, if you were forced to shoulder a high APR, your auto loan may be costing you more than your other debts. If that’s the case, we recommend paying off your auto loan before your less expensive debts like personal loans and medical debt.

And, if you don’t have an auto loan but are eyeing a new ride, consider whether you should buy or lease.

Student Loans

Student loans are more nuanced than some other types of debt—especially if they’re federal loans. Most importantly, federal student loans have relatively low interest rates (about 2.75% for undergrads) and offer borrowers a number of perks, like income-based repayment and deferment. And, unlike many other forms of debt, interest on student loans—both federal and private—is tax deductible, with a maximum deduction of $2,500 per year.

There are also a number of forgiveness programs available for federal loan borrowers—most notably the Public Service Loan Forgiveness Program—whereby a borrower’s repayment obligations are cancelled if they meet certain requirements. Federal student loans may even be put into forbearance as they were in the wake of Covid-19.

Finally, there are limited circumstances where student loans may be discharged, including in bankruptcy—though this is challenging and requires additional legal steps. Because of these unique features, student loans should probably be among the last debts you pay off—especially if you might qualify for forgiveness or discharge.

Home Loan

While a mortgage is usually the largest loan someone takes out in their lifetime, mortgages do come with a number of benefits for borrowers. As secured, federally-insured loans, interest rates on mortgages are often the lowest available for any form of debt—currently around 3%.

What’s more, mortgages usually have 15- or 30-year terms, so the monthly payments tend to be smaller and more manageable than some other forms of debt. Bonus: mortgage interest is tax deductible if you itemize, so it makes sense to keep the loan on your books.

Taken together, these characteristics mean that mortgage debt is typically the last loan you should pay off. In fact, many people pursuing a debt-free lifestyle don’t even count their mortgage when calculating their outstanding debts.

Additionally, you might be able to lower your monthly mortgage payment substantially by refinancing. If you’re not sure whether or not a refi is a good move for you right now, check out this guide to refinancing from our friends at What’s My Payment.

5 Tips for Paying Off Debt Quickly

Everyone’s financial needs are different, but there are some basic guideposts you can follow when choosing which debt to pay off first. Review these considerations before planning your debt payoff strategy:

1. Start by paying off debt with the highest interest rate.

Consumer debt, like a credit card or payday loan, often comes with much higher interest rates than other forms of debt. If your primary goal is to save money over the life of your loans, start by paying off your highest interest rate loan first. Then, move on to the next highest and next highest until your debts are paid off.

2. Pay off debt with the smallest balance first.

Paying down debt can feel like a slog so it’s nice to feel like you’re making progress. By focusing on your smallest debts first, you can cross individual loans off your balance sheet, while quickly eliminating monthly payments from your budget. Once paid off, you can even reroute those payments to make extra payments on larger loans. If this sounds appealing, check out the debt snowball method.

3. Prioritize secured debt over unsecured.

Secured loans typically have lower interest rates than unsecured loans because they pose less risk to the lender. That said, if you default on a secured loan, the lender may take your collateral. To eliminate the risk of a lender repossessing your car or foreclosing on your home, consider paying off those secured loans first.

4. Focus on debt that impacts your mental health.

Aside from the financial implications, debt can have unique and powerful impacts on your mental wellbeing. For that reason, you may find that paying off certain debts helps relieve financial stress or just helps you stay enthusiastic about your finances.

5. Consider debt consolidation.

If you’re trying to pay off debt but don’t see a clear strategy, consider taking out a single personal loan to consolidate your other balances. If your credit score has increased, this may be a good way to decrease your overall interest rate. But at a minimum, you’ll be able to streamline your payments.

Above all else, don’t be delusional or in denial about your debt

Whether you’re trying to pay off all of your debt or just want to improve your financial literacy, understanding the types of debt is key to the process. Once you understand how each type of loan works—from revolving lines of credit to secured mortgages—you’ll be able to make smart decisions about which to pay off first. Even better, you’ll have the confidence to choose a debt repayment strategy that benefits your bank account and your peace of mind.