July 17, 2019

Which Debt Payment System Works Best

On several occasions I have written articles on various methods to end your debts . Basically, we have the debt snowball method, with two variants:

  • Start with the debt that has the smallest amount.
  • Start with the debt with the highest interest rate.

In today’s article, we are going to make some numbers to see which of the two debt payment systems works really better.

 

Starting with the Smaller Debts

Smaller Debts

Using the traditional snowball method, Oscar would focus on paying off his smaller debts first, while making minimum payments on the rest.

The first month Oscar has an extra of 321.71 euros (979.17 euros – 657.46 euros) and applies it to the smaller debt. It would take 14 months to end this debt.

At 14 months, Oscar would have an extra of 371.74 euros (321.71 euros extra every month + 50.03 euros of the minimum payments of the first debt he no longer has to make) each month and applies it to the second debt of 11,000 euros. As he has been making the minimum payments he has to return 10,029.12 euros.

I would end this second debt in 36 months.

At 36 months, Oscar would have an extra 493.86 euros (321.71 euros extra every month + 50.03 euros of minimum payments of the first debt + 122.12 euros of minimum payments of the second debt) and what applies to the third debt of 40,000 euros.

As he has been making the minimum payments he has to pay 31,137.16 euros. He would have just paid off this debt in 72 months, and therefore it would take him 72 months to end his debts .

 

Starting with Debts with Higher Interest Rate

Starting with Debts with Higher Interest Rate

Using the highest interest rate method, Oscar would focus on paying the 40,000 euros debt, which is the one with the highest interest rate. And I would continue to make minimum payments on other debts.

For the first debt Oscar has an extra, as we saw before, of 321.71 euros, which applies to the debt with the highest interest rate. Therefore, it would take 61 months to pay off this debt.

At 61 months, Oscar has an extra 807.02 euros (321.71 euros extra every month + 485.31 of the minimum payments he no longer has to make) and applies it to the next debt with the interest rate plus high, that of 11,000 euros.

As he has been making the minimum payments he has to pay 6,226.32 euros for what he would pay this debt at 68 months.

At 68 months, Oscar has an extra 929.14 euros and applies it to the remaining debt. As he has been making the minimum payments he has to pay 2,397.76 euros. And he would end all his debts in 71 months .

 

What method do you win?

get money

The method of starting with the debt with the highest interest rate makes paying the debts faster, so in the long run less interest is paid.

However, the ” successes “, that is, ending debt, do not start happening until 5 years have passed. With the traditional snowball method starting with the smallest debt, successes occur much more frequently

written by admin - Posted in Uncategorized

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