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Paying Off Debt

Not all debt is equal. The priority of paying it off depends almost entirely on the interest rate.

Info

For comprehensive UK-specific guidance, see the ukpersonal.finance debt guide ↗.

High-interest vs. low-interest debt

TypeInterest ratePriority
Payday loans100–1,000%+Urgent — pay immediately
Credit cards20–30%High — pay before investing
Store cards / buy-now-pay-later30–50%High
Personal loans5–15%Medium — depends on rate
Car finance3–15%Medium
Student loans (UK Plan 2/5)RPI or earnings linkedLow — often not worth overpaying
Mortgage2–6%Low — better to invest

Rule of thumb: pay off any debt costing more than ~5% before investing. Below that rate, the expected return from long-term equity investing (historically ~7% real) likely exceeds the interest saved.

UK student loans

UK student loans are income-contingent and written off after 30–40 years. Most graduates with Plan 2 or Plan 5 loans will never fully repay them. Making voluntary overpayments is often a mistake. Check the ukpersonal.finance student loan guide before overpaying.

Payoff strategies

Once you have a list of debts to eliminate, choose a strategy for extra payments beyond the minimums.

Avalanche (mathematically optimal)

Pay minimums on all debts, then throw every extra pound at the highest-interest debt. When it is gone, roll that payment into the next highest. Saves the most money in interest.

Snowball (psychologically motivating)

Pay minimums on all debts, then target the smallest balance regardless of interest rate. Quick wins build momentum. Costs slightly more in interest but works well if motivation is the challenge.

Hybrid

Eliminate any very small balances first (snowball) to reduce the number of accounts, then switch to avalanche for the remaining debts.

Tracking debt in WealthMgr

  1. Add each debt as an account: go to Accounts → Add account, set type to Liability and choose the subtype matching the debt (Credit Card, Loan, Mortgage, Family Loan).
  2. Set the opening balance to the outstanding amount owed.
  3. Record payments as transfers from your current account to the liability account — each transfer reduces the balance.
  4. Create a recurring rule for the minimum payment so it runs automatically each month.
  5. Use Reports to chart the liability balance decreasing over time.

Tip

With all debts added as liability accounts, your net worth on the Dashboard reflects what you owe. Watch that figure rise as debt falls.

After debt is paid off

Once high-interest debt is eliminated, redirect those monthly payments to:

  1. Building your full emergency fund (if not already done).
  2. Increasing pension contributions.
  3. Saving for medium-term goals.
  4. Investing in a Stocks & Shares ISA.