While there are many ways to get into debt, there’s only one way to get out of debt. And that is to pay it all back. You may be content to just to pay it back over the term of the loan, but what if you have multiple loans and want to get out of debt a little quicker? This is not only smart, as you will save money on interest, but if you are able to do so, it should definitely be considered. The hardest part about paying off is figuring out which debt to tackle first.
Here is the key, you should plan on paying a little extra whenever you can. When you put money toward the principal, you will save money by paying less interest. That is the best way to save money while paying back a loan or debt. There are two primary ways of doing this: the avalanche method and the snowball method. Here is a brief explanation of each method so you can decide which method works best for you.
The Avalanche Method
In this method, you look at the interest rates of each loan and start by paying off the loan with the highest rate, and don’t take any other factor into account. The advantage to this strategy is that you will save money on interest. Depending on the amount of the debt, you may not pay it off as quickly as you would a smaller loan, but the primary goal of the avalanche method isn’t just to pay it off, but to save the most money on interest as possible. Generally, you will be using this method to pay off a credit card since most credit cards have a higher interest rate than other types of secured credit. This will also work to your advantage as paying off a credit card has a more significant impact on your credit than paying off other debts.
The Snowball Method
This is the method our advisors recommend. In the snowball method, the only thing that matters is the amount you have left to pay. You simply pay back the debt with the smallest balance first. This can give you a sense of accomplishment as you pay individual debts off. In the short term, you may not feel like you’ve saved money, but by paying off one loan, you can now take the money you were putting towards that debt and pay extra towards the next smallest remaining balance. You repeat this cycle until everything has been paid.
In either method, the goal is to get out of debt. If you can do it without having to consolidate debts, or getting a loan to pay off debt, it should be considered a win. If you would like help getting your finances in line, visit your local branch. A personal banker can sit down with you and help you get organized and help you determine what to do next.