Repaying Debt: Paying The High Interest Debt or Debt Snowball?
If you have made up your mind to zero out your debt, organizing where to start and how-to maybe your challenge. In cases where your debts are mixed up with multiple credit cards, payday loans, student loans, or any lines of credit or even mortgage, crafting a repayment plan and coming up with the number might give a headache.
Moreover, you might be hesitant and uncertain which to pay fist and how you can strategize your finances to pay it off. In this guide, you can conclude as to which method might be more favorable in your situation. Understanding each will help you decide on what path to take and which method might work.
Paying the High Interest First
Each loan carries an interest charge which rate may vary. In terms of credit card debt, the interest rates may be ranging approximately between 20% to 30%, 6% to 10% for lines of credit, and student loans can be between 6% to 8%, while your payday loans might be above average. Realizing your interest rates and considering it is important as the higher it is, the more it can cost you. Hence, paying off the ones with the highest interest rates down to the lowest can be the most practical means to save more money.
In this manner, you may need to lay out your entire debs and rank them according to the highest interest rates down to the lowest. After, you can prioritize paying more than the minimum on the debt with the highest interest and pay all the rest with its minimum payments.
When you’ve finally eliminated the first in your rank, you can focus on the second with the same idea you did on the first rank, then so on and on. By doing so, you’re targeting the biggest load in your carriage. Besides, the extra dollar you pay for the highest interest debt can help you shorten your payment terms and can save you more. So, the bigger you put in as an extra payment, the more money you can save, the shorter the time you’ll be in debt.
Debt Snowball For Eliminating Debt
So let’s say calculations are just elementary for you, yet wondering why still in debt. Well, you might have the best spreadsheet in tracking your payments, but what if you don’t have the right attitude. It becomes an issue when you know what to do, and you know where to start, but do not have the will to do it.
The fact is, it’s just easy to borrow money but indeed hard to repay. This is concerning your behavior, and no logical mathematical equation can change it. This is where debt snowball comes in. Since the snowball method focuses more on motivating a person to sustain the momentum and keep up the payments. So, instead of ranking your debts according to its interest rates, you will lay them out from the smallest amount to the largest amount that you owed.
Through the snowball method, a person who lacks enthusiasm and drives to settle their debts may see meaning in knocking each debt one by one as they see progress and attain a sense of fulfillment.
Snowball Method Explained
Furthermore, some may owe a small amount costing $200 on one credit card and another $300 on the second, and maybe $1,000 for car maintenance, a $7,500 of student loan debt, and $11,000 of credit lines. To start with these 5 loans, if your credit lines accumulates the highest interest rates then the earlier method will necessitate you to pay it off first. Hence, it will tell you to focus on your $11,000 loan, which is time-consuming and might cause you exhaustion if being patient is not in your nature.
But, in a snowball method, you will have to sort the ones with the smallest debt first. In this manner, you’ll be targeting your $200 loan first which might just take you a month to pay it down. This will leave you with 4 more loans having the loan amount of $300 from your second credit account, which you can settle may be as short as 2 months. In this scenario, paying down 2 debts in 2 months might already be a stepping stone for you to keep the momentum and get more excited in keeping the challenge.
Which is the Best for me?
Learning and understanding these two methods can give you an idea on how to repay your debt. If you favor the benefits that you can get in paying for the highest interest first, then follow it. But, if you lack discipline in sticking to the calculations or may regress in the long run, then you might consider the snowball method.
Conversely, if you are still hanging behind no matter what you follow, you should seek professional help that can aid in eliminating your debt. To explore your options for a debt relief program such as debt consolidation, debt settlement, or other alternatives, simply fill out the debt relief form on this page.
CONSUMER PROPOSAL EXAMPLE
Example Unsecured Debts
|2||Credit card 1||$6,812|
Your Monthly Repayments Would Be
a Consumer proposal $748
(total contractual repayments)
a Consumer proposal $295
(total contractual repayments)
* Subject to creditor acceptance
* Payment subject to individual circumstances
* Credit rating may be affected
* Fees apply, subject to individual's circumstances.