Why you need a payment plan for your debt
It’s human nature to forget about uncomfortable financial realities – and nowhere is this more true than where our debt’s concerned.
The monthly payables become a subconscious habit, painful as it may be, and very few people stop to think about how to reduce their loan terms.
If your debt is weighing down on your financial shoulders, it’s easy to stay focused on keeping your head above water, and not necessarily taking control over your loans. Both of these examples are great reasons for making a payment plan for your debt.
Without a targeted strategy, though, you’re not going to magically get rid of your debt.
Without a targeted strategy, though, you’re not going to magically get rid of your debt.
Becoming debt-free requires hard and dedicated work, and will affect your day-to-day finances. You can obviously create your own payment plan manually, but this is usually time-consuming, and it can be difficult to keep track of interest rates – and interest rates’ interest rates.
That’s why making use of a debt calculator is a good way to go.
Our debt calculator will get you on the right track!
How the debt calculator works
A debt calculator is a tool that makes it possible to automatically generate a detailed payment plan for your outstanding loans. With our calculator, you won’t have to dig through a sea of bills to calculate your payment plan.
In fact, you only need 3 pieces of information about your debt accounts to use the debt calculator.
- Current debt remaining
- The lowest monthly payable
- Interest rate
It’s easy to add more than one account to the debt calculator. If you have outstanding loans with more than one creditor it’s important to do so. This is the only way to get an accurate and realistic payment plan, that actually reflects your debt. In addition to a simple and easily understandable design, the debt calculator allows you to tailor the payment plan according to your personal finances. Firstly, you can select which payment plan strategy you’d like to use (more on these below). Secondly, you add the start date for your payment plan. And finally, you add your monthly payment plan budget. Getting hold of a solid debt payment plan doesn’t get much easier than this!
Our debt calculator allows you to choose your own payment plan method. There are four of these strategies, and it’s important for you to pick the one that’s most compatible with your personal finances.
Here’s how you use the debt calculator
- Debt account: Use this field to name your debt accounts. For example: Mastercard credit card
- Current debt remaining: The amount left to pay on your loan or credit card.
The lowest monthly payable: The minimum amount you have to pay off each month. You can find this sum on statements from your creditors - Interest rate: The interest rate on your loan or credit card. If you’re unsure, contact the card issuer for your rate.
- Choose your payment plan budget: The amount you can afford to spend on paying off debt each month. The higher the amount, the shorter the loan term.
- Choose your payment plan method: This field gives you a quick overview of the different strategies. Choose the one that’s most compatible with your personal finances.
1. The debt snowball method as your payment plan strategy
The debt snowball method is a recognized and well-documented payment plan method.
The strategy is used by economists across the globe and has been proven to be highly effective in practice.
The strategy treats your debt as a snowball; it starts small and ends big.
With the debt snowball method, you start with the smallest debt account first and work your way up in consecutive order. You don’t pay attention to interest rate or other loan costs – it’s the loan amount that dictates the order of the debt accounts. By choosing this method you’ll ensure motivation boosts early in your payment plan period.
2. The debt avalanche method as your payment plan strategy
Just like the debt snowball method, the debt avalanche method is also recognized internationally. This means it’s efficient, targeted, and has worked in a number of different studies.
Using the debt avalanche method, you target your debt accounts in order of interest rates, starting at the top. In other words, you start with the loan or credit that has the highest interest rate and work your way down. For most people, this will mean that you start off with loans like credit card debt and unsecured or payday loans, and end up with your mortgage.
From a purely financial perspective, this is the best method for your payment plan, as it ensures you pay off the loans that cost the most first.
In situations where the most expensive loan is also the biggest, the debt avalanche is not necessarily your best bet, though. When this is the case, you’ll have to work over a long period of time to get rid of your first debt account, which may drain your motivation.
3. The highest monthly payable method as your payment plan strategy
The monthly payment on a loan will be largely dependent on its loan term. Simply put, a shorter loan term will lead to higher monthly payables and a longer loan term will lead to lower monthly payables. If you select the highest monthly payable method as your payment plan strategy, you’ll focus on debt with the shortest loan terms first.
Generally speaking, this will be payday loans or credit card debt – and in a few cases, personal loans. If you have debt in one or several of these loan forms, this payment plan strategy will be best for you.
By choosing it you’ll get rid of expensive loans as quickly as possible, and won’t have to worry about extending your loan term. On high-interest loans, this is always an expensive solution.
4. The highest monthly interest payable method as your payment plan strategy
You can also choose to focus on the debt with the highest monthly interest payable as your payment plan strategy.
This is different from the debt avalanche method in that the focus is on monthly costs, rather than the general interest rate on the loan.
In essence, though, these strategies are still very similar; you’re trying to get rid of the most expensive debt account(s) first.
Debt with high monthly interest payables is the ones with long loan terms and a high-interest rate – like personal loans or payday loans.
Credit card debt will fall under this category, too. If you’d like to cut down your monthly debt costs, this is probably the best strategy for you.
When you focus on the debt with high-interest payables first, you’ll be able to reduce your loan terms quite considerably.
Tip!
No matter which strategy you choose, it’s important to always consider which method works best with your personality. When you’re working towards becoming debt-free, motivation is your number one tool. That’s why you need to pick the strategy that keeps your drive strong, throughout the payment plan period.
Read our complete guide on how to become debt-free here