What is Medium-interest Debt?

Quick Look

  • Medium-interest debt typically has interest rates in the mid to high single digits (e.g. perhaps 4% – 9%).
  • Paying down this type of debt is often done with consideration to your other financial priorities like increasing the size of your emergency fund or long-term saving and investing (e.g. a home down payment, retirement etc.).
  • With medium-interest debt, you can consider not paying it off as fast as possible if the interest rate is lower than interest earning opportunities that you would otherwise put your money toward.


It’s All Relative

Interest rates fluctuate so the term “medium-interest” is relative. But generally speaking, rates between 4% and 9% may be considered “medium-interest.” Depending on the balance owed and how long you hold it, this type of debt can cost you a very significant amount of interest over time. But unlike high-interest debt (which may have interest rates more than twice as high), carrying this debt for a while is not likely to be crippling to your financial health.

Common Examples of Medium-interest Debt

Your rates may vary but the types of debt listed below often have interest rates in the “medium” range.

Type Average Interest Rates* (according to Bankrate.com as of May 2021)
Student Loans Federal student loans may have lower rates than private student loans and private rates can vary significantly. According to Bankrate.com, fixed rates range between 3.35%–14.5% while variable rates range between 2.11%–12.94%.
Auto Loans These loans may start with an introductory rate that is low but jumps into medium-interest once that period ends. According to Bankrate.com, the average APR for a new car is anywhere from 3.24% to 13.97%, depending on your credit score, while the average APR for a used car is 4.08% to 20.67%.
Personal Loans These loan rates may vary widely (3 to 36%) depending on the amount borrowed, term for the loan (payback duration), your credit score etc. As of August 2023, the average personal loan interest rate is over 11%.
Home Equity Loans The range can vary based on your credit score, the amount borrowed, and more. According to Bankrate.com, the average Home Equity Loan Rate is over 9% as of August 2023.

Term Lengths for Medium-interest Debt

Another distinguishing feature of most medium-interest debt is that it likely has a term length. In other words, in the borrower’s agreement you signed when you took on the debt, you agreed to pay back the entire loan principal, plus interest, by a certain date.

(This is different from credit card debt for example, where your only payback requirement is a monthly minimum payment often based on the total percentage of your current balance.)

With a term length, the lender will automatically calculate your monthly payment amount so that the loan will be paid off in full – including the interest they charged you – by the term end date.

If you review your statement, you’ll see that with each payment, the monthly amount you pay is fixed but an increasingly larger percentage of your payment will go toward the principal and less toward interest. Therefore, if you are able to pay more than the amount required each month, you will pay down the loan before the term’s end date and end up paying less total interest.

Opportunity Cost

Let’s be clear: All interest-bearing debt costs you money. In a perfect and simpler world, having no debt would be best. However…

Imagine you have $10,000 in debt with a 4% APR and a term length of 5 years. Now imagine you get an unexpected $10,000 financial windfall. What should you do? Should you pay off your debt immediately, or should you invest that money? Here’s how it could play out:

Scenario Charged Interest Rate/Rate of Return Interest Savings/Earnings
Pay Down Debt Immediately 4% (charged) You would save $1,049.91 in interest costs you would have otherwise paid over five years.
Invest the Money in an Index Fund 7.5% (annualized compound rate of return) You could earn $4,356.29 after five years.

In the example above, you would be better off by $3,306.38 at the end of five years if you invested the money. The main difference is that by paying down the debt immediately, you’re
guaranteed to save $1,049.91 whereas if you invest the money, you may or may not get a 7.5% rate of return. It could be much better but it could also be a lot worse (you could even lose money). Therefore, you have to find the balance that feels right for you based on your personal risk tolerance and the investing opportunities available to you.

But, if your debt is under control, if you have a certain level of financial discipline (as in, you will actually invest the money you have and not spend it), and if you are ok with some risk, there may be times when investing extra cash (either monthly or through a one time lump sum investment) may make more financial sense than paying off the debt as fast as possible.

Financial Priorities

In the Growth stage, you will focus your attention on growing your emergency fund, funding your long-term savings, and paying down medium-interest debt. Each of these deserve some of your financial resources. But that precise balance may depend on your specific circumstances and your other financial priorities.

Ask yourself which of the statements below resonate with you and how it might affect your approach to paying down medium-interest debt.

  • It’s important for me to save liquid cash for a home down payment (or other significant cost) I plan to make in the next few years.
  • My job situation is less stable than I’d like and having a larger emergency fund sooner will help me feel more secure.
  • It’s important for me to maximize my retirement savings so I can retire more comfortably or earlier. The earlier I invest, the longer my time horizon and the more likely I am to achieve a good rate of return.
  • I’m tired of having this debt and I just want to be rid of it! I’ll double down on other priorities once this debt is gone!

There’s no right or wrong way to feel about the statements above. But the more you know why you’re allocating your resources in a particular way, the more likely you are to stay the course and achieve the results you desire.

Take Action

In the notes section above (logged in users only),  write a sentence about how you plan to tackle your medium-interest debt and why you plan to tackle it that way.

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