Tired of paying multiple debts? Worry no more. It might be quite challenging to determine which debts you will pay first but setting out a good plan can help you to overcome the struggle.
Also, regardless of the reason that got you in debts, you are not alone, a research done by the Pew Charitable Trusts shows that nearly 80% of Americans are living with some debts.
Even if your debts resulted from accidental overspending or in an expected emergency, don’t be ashamed of what you owe, and start taking steps towards achieving your well-deserved financial stability.
This expert guide will help you find the best strategy that you can apply to repay your loan. As both analyzed approaches have pros and cons, it is up to you to research your options and decide which strategy would best fit your circumstances.
As a first step, we have outlined the common types of debts to help you know under which category your loan is classified. Check them out.
This method consists of paying the debts with the highest interest rates first. It means that although you are still contributing to the repayment of the other loans, you are focusing more on the investments with the relatively higher interests. Many experts recommend this method since it is believed to save the borrower much cash. How? Since the interest is high, getting rid of those costly debts will save money in the long run.
By using this method, the borrower settles the debts by first focusing on the smallest debt balances irrespective of their interest rates. Typically, this method is more expensive than the first one although psychologists and researchers have found that the technique motivates you since the progress is visible. As you start by paying the smaller balances, you will gradually get rid of them and probably remain with only one debt.
So, you have a total debt of $24,000 and a total minimum payment of $470.
And now let’s see how you can pay the debts using both methods.
As mentioned earlier, the debts with the highest rates are paid off first using this method. You will first pay the minimum payable amount of credit card debt. You will remain at $280, which you will use to pay the remaining loans. By using this method, you will have paid a total of $26,919 within 36 months.
Pay off the smallest debt first. You will start by paying the extra $280 to the personal loan, followed by the credit card loan then finish with the student loan. By using this method, you will pay $28,182 within 38 months.
As you can see, the avalanche method will save you $1263 and also clear off your debts 2 months earlier.
The snowball amount is higher by $1263, which seems like a huge difference. However, the interest difference is just $25 per month. Researchers argue that most people tend to be worried about the final amount that they would have paid for the loan, and not what they are left within their pockets.
It implies that if you have two loans amounting to $500 and $1000, you would be happier and motivated if you paid $400 to the $500 debt other than splitting the amount and contributing $200 to each loan.
Although the payment is still the same, the first one makes you feel like you have accomplished something bigger since the credit is 90% paid.
You see, both methods have their pros and cons and thus making the decision entirely depends on your personal preference.
Works Cited
2 Consumerism Commentary “Debt Reduction Methods and Philosophies: Snowball, Avalanche and More” https://www.consumerismcommentary.com/debt-reduction-methods-and-philosophies-snowball-avalanche-and-more/
3 Dave Ramsey “How the Debt Snowball Method Works ” https://www.daveramsey.com/blog/how-the-debt-snowball-method-works
4 Consumerism Commentary “The Debt Snowball” https://www.consumerismcommentary.com/debt-snowball/
5 Everydollar “The Debt Snowball: How and Why this Method Works” https://www.everydollar.com/blog/how-the-debt-snowball-method-works
6 Nerdwallet “How to Use Debt Avalanche” https://www.nerdwallet.com/blog/finance/what-is-a-debt-avalanche/
7 Consumerism Commentary “The Correct Way to Pay Off Personal Debt: The Debt Avalanche” https://www.consumerismcommentary.com/the-correct-way-to-pay-off-personal-debt-the-debt-avalanche/
What better way to help others than through the written word! And Casey Bond does exactly this in terms of people’s financial situations. She’s a personal finance writer and also an editor. She guides consumers and other financial writers based on her rich knowledge garnered at @Antioch University in Los Angeles.
