There is a debate among financial planners about how best to pay off debt. Some say that paying high interest rates is the best way to go; some say paying the low balance first is the best option.
Both methods have advantages and disadvantages, so we will look at both, and help you decide which method is best for you.
Option # 1 - High Interest Rate
In this way, you focus on paying your high interest rates first. The basic steps in this approach include:
1. List all the debts in order from the highest interest rate to the lowest interest rate.
2. Commit to paying the minimum amount for all debts.
3. Find out how much extra money can be spent on high-interest loans.
4. Repay a small amount and an additional amount on the loan with the highest interest rate until it is repaid.
5. Once that debt has been settled, use the amount you have paid on the debt you can owe at the next high interest rate until you have paid off.
6. Repeat until all debts have been paid in full.
This method is the best mathematical method, as you will pay less interest over time.
Method # 2 - Very low balance
In this way, your focus is on debt with very low balance. Note: this method was made famous by Dave Ramsey and is often called the Debt Snowball method.
The basic steps in this approach include:
1. List all the debts in order from smallest to largest.
2. Commit to paying the minimum amount for all debts.
3. Find out how much extra money can be spent on a very small balance loan.
4. Pay a small amount and an additional amount on credit with a lower balance until you are paid.
5. When that debt is settled, use the repayment on the next loan until it expires.
6. Repeat until all debts have been paid in full.
This method may not be the best mathematical method, as you will pay extra interest over time. However, this method allows you to pay off small debts quickly, which may give you the motivation you need to stick to your mortgage plan.
So, which is better for you? It depends on.
Option # 1 is for you if:
* You have debts with the same balance
* You are instructed to adhere to your repayment plan
* You are a digital person, and you see the benefits of repaying high interest loans first
Option # 2 may be better for you if you:
* Your debts do not have the same balance - that is, you have a $500 credit card balance, $12,000 credit card balance, and a few.
* You need inspiration - paying off a small credit card balance may be the motivation you need to stick to your credit plan
* You do not have to worry about paying extra interest over and over again to get the lowest price first
Tip: Why not use a combination of these two methods? Using a combination of both methods allows you to feel complete about paying off that initial debt (a small credit card balance), and gives you the motivation to start working on the next loan (maximum interest rate).
Remember, the one that works best for you is the one you will actually use. The most important thing is to make a plan and stick to it to live without debt
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