Not all debt is equal. The priority of paying it off depends almost entirely on the interest rate.
Info
High-interest vs. low-interest debt
| Type | Interest rate | Priority |
|---|---|---|
| Payday loans | 100–1,000%+ | Urgent — pay immediately |
| Credit cards | 20–30% | High — pay before investing |
| Store cards / buy-now-pay-later | 30–50% | High |
| Personal loans | 5–15% | Medium — depends on rate |
| Car finance | 3–15% | Medium |
| Student loans (UK Plan 2/5) | RPI or earnings linked | Low — often not worth overpaying |
| Mortgage | 2–6% | Low — often 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
- Add each debt as a Liability account: Accounts → Add account, type: Liability, subtype matching the debt type (credit card, personal loan, mortgage, etc.).
- Set the opening balance to the outstanding balance.
- Record payments as transfer transactions from your current account to the liability account — the balance decreases with each payment.
- Create an automation rule for the minimum payment to run automatically each month.
- Use Reports to chart the liability balance decreasing over time.
Tip
After debt is paid off
Once high-interest debt is eliminated, redirect those monthly payments to:
- Building your full emergency fund (if not already done).
- Increasing pension contributions.
- Saving for medium-term goals.
- Investing in a Stocks & Shares ISA.