How to Decide Debt Repayment Method
Once you have fallen into debt, it seems all but impossible to get out of it. Do not lose hope because there is still a way to overcome the mounting burden of debt. When you are juggling with multiple debts, you have two methods to consider: debt avalanche or debt snowball.
A debt avalanche method will allow you to settle your debts from high interest to lower interest debt regardless of the balance. In contrast, a debt snowball method will allow you to pay off from the smallest balance to the largest balance irrespective of interest rates.
It can be not very clear to find out which method is more appropriate for your financial condition and goals. For some people, the debt avalanche method is more ideal because you can save money in interest while others will find the other method more ideal because it helps build motivation.
When you have a lot of debts like 24-hour loans in Ireland, credit card bills, and auto loans, you will scratch your head before arriving at a decision. You might be confused about whether you should pay high-interest debs first or low-interest debts first. Do away with all of your worries because below are the reasons explained when which will be an ideal choice.
When should you pay off debts with high interest first?
Most of the people find it beneficial to pay off debts with high interest first. This makes sense because you can save a lot of money in interest. Debt with high-interest rate will cost you much more if you do not pay them off as soon as possible.
The money you save in interest will pay you off in the long run. You can use that money toward the repayment of other debts. However, not everyone particularly fits in this scenario. Your high-interest debt is likely the largest.
If you try, your high-interest debt is likely the largest debt. If you try to pay it off first, it might take more than a year to get settled. Of course, paying your high-interest debt plan will not stand you in the stead. It will be painful when you find that you are not reaching your goal sooner. You will get demotivated and eventually give up in the middle.
When should you settle your small debts first?
This method will be an ideal choice when you find it motivating you. Of course, you will have to look over your financial condition before opting for the plan. If your budget does not have enough wiggle room, you will undoubtedly continue to repay small debts first.
Not only will it keep you motivated, but it will also help you reach your goal faster. However, you will still end up paying a lot of money in interest. This is because you will pay larger debts in the end.
Sometimes you may need to follow a balanced approach
If you want to reach your financial goal, you will have to be more strategic and balanced. You may be buried under several debts, but all of them may have more or less similar interest rates. For instance, credit card bills and outstanding cash loans will not show a significant difference in interest rates, and you may have no other debts except a few small loans.
So, you can decide which to pay off first quickly. A good rule of thumb says that before you decide on a debt repayment method, you should find out which will yield benefit to you. If you can save money with the debt avalanche method, go ahead with it. Otherwise, opt for the other method.
Remember that you cannot back out once you have chosen the plan. It is always advisable to opt for the plan carefully. Otherwise, you will not stay focused and end up being in a never-ending cycle of debt.
If you have stuck with multiple debts and want to get out of the, you will have to decide which repayment method will suit you. Analyse your financial condition and then make a decision. Do not forget that you will have to stick to your plan until you have settled all of your dues.