Your Money, Your Future
Your Money, Your Future

Struggling consumers may be paying the wrong debt first

Key Points
  • Consumers are least likely to be delinquent on personal loans, followed by auto loans.
  • Secured debts often take priority over unsecured loans.

If you're struggling to pay your bills, it's not always easy to decide which debts should take priority.

Personal loans often take the lead, with consumers least likely to be delinquent on them compared with other debts, according to a new report from consumer credit company TransUnion. Auto loans had the second-lowest rate of delinquencies, followed by mortgages and credit cards.

The study observed the credit behavior delinquencies of consumers who had at least one active auto loan, credit card, mortgage and unsecured personal loan (and were current on those debts at the time of selection). TransUnion picked a new cohort of 2 million such consumers each quarter from 2009 to 2015, and reassessed their performance and delinquencies after 12 months.

Dealing with debt collectors

This is the first wave of the study that included personal loans, and researchers said they weren't expecting to see them top consumers' debt priorities.

"That was very surprising to us," said Nidhi Verma, a senior director at TransUnion and co-author of the study.

Consumers probably aren't putting personal loans first as a matter of importance, she said. It's likely more about the nature of the debt: Personal loans tend to have short terms compared with other debts, and loan amounts also tend to be smaller — leading to small monthly payments. Struggling consumers may see it as an easier debt to keep up with.

"It's not really a preference question here," Verma said. "People would prefer to stay current on all their debts if they could."

Here's how to figure out the right way to prioritize:

Ask for help

As soon as you realize you're in danger of not having enough to cover your monthly bills, reach out to creditors to see if they can help, said Verma. Doing so generates more goodwill than reaching out after you're already delinquent, and there are a range of ways that lenders may be able to help — from temporarily reducing interest rates and minimum payments to working out payment plans. That can mean you don't need to prioritize.

You might also look for a financial counselor or nonprofit credit counseling agency for help with debt management and budgeting strategies.

List out debts

If you're in a financial crunch, make a list of your debts and their context in your life, said April Kuehnhoff, a staff attorney at the National Consumer Law Center. That can help you sort out which should come first.

"There's no single magic list of what's the highest-priority debt," she said.

In the NCLC's book "Guide to Surviving Debt," the advocacy group recommends putting family necessities (such as groceries and unavoidable medical expenses) first, followed by housing-related bills (including the minimum to keep utilities going) and car loans (if you need to keep your car). Child support and tax debts also tend to fall toward the top of the list, Kuehnhoff said, because the government has a greater ability to collect on those by garnishing your paychecks and seizing tax refunds.

Consider the consequences

"Factor what's at stake," said Bruce McClary, a spokesman for the National Foundation for Credit Counseling. "You have to think beyond the obligation itself to, what it connects to."

Secured debts — those backed up by an asset such as your home or car — often have more far-reaching and immediate consequences than unsecured debts like a credit card balance or personal loan. For example, missing a car payment isn't just about the risk of a late fee or damage to your credit score. It could mean losing the car, he said — making it tougher to get to work and earn money to meet all of your financial obligations.

BirdofPrey | Getty Images

Don't prioritize pushiness

Just because somebody is calling you frequently doesn't mean they are your most important creditor, said Kuehnhoff of the National Consumer Law Center.

It's important to know your rights under the Fair Debt Collection Practices Act, which protects you from being harassed, she said. There are steps you can take to get collectors off your back, giving you more breathing room to strategize.

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