There are two popular methods that people use to pay down debt. The traditional method is called "debt stacking", while the second mode is called "debt snowball" and is recommended by the popular financial expert Dave Ramsey. Let's take a look at the pros and cons of each.
Debt Stacking
The method of "debt accumulation" recommends that you ranked a list of all your debts by interest rate, highest to lowest. For example, you must:
- Mastercard $ - 2500-19 percent - the highest rate
- Visa $ - 7500-13 percent - the second installment
- Car loan $ - 4000-8 percent - the third interest
- Student Loans $ - 1.900 to 5 percent - the lowest rate
The method of "debt accumulation", shows that you make the minimum payment on all your loans. Then you have to take all your money to your MasterCard card to pay the highest interest rate to 19 percent.
Once you have removed debt by 19 percent, Visa balance sheet approach, which has the highest interest rate on the second 13 percent of your MasterCard.
You will have plenty of time to pay for the visa, because he has the highest level at $ 7,500. Stay with it. When you are finished, you can begin with lower interest concerns over the debt.
Advantages: This method saves more money in interest payments.
Disadvantages: It may take some time to a high residual guilt scratched your list. You feel frustrated after investing so much time and energy to get a loan without a mind experience "victory" through the list to pay.
Debt Snowball
After the snowball method, you should every penny pieces to repay the loan and the balance low, regardless of the interest rate.
If you used the snowball method, every time you order the above list as follows:
- Student Loan $ - 1.900 to 5 percent - the lowest balance
- Mastercard $ - 2500-19 percent - second lowest balance
- Car loan $ - 4000-8 percent - the third lowest balance
- Visa $ - 7500-13 percent - the highest balance
Want the minimum payment on all to make your loans. Then you can throw every penny of debt with the smallest balance, regardless of the fact that - in this case - it also has the lowest interest rates.
The idea behind this method is that the payment of the loan with the lowest balance will you go to the psychological sense of "victory" by the credit of the list. It is mental "victory", will motivate you to continue to save money and pay off debts.
Advantages: This method returns an immediate sense of victory.
Disadvantages: It's expensive. You will pay more in interest, with respect to the stacking method of debt.
Which method to use?
I is my personal finances ... well ... personally.
Payment of debt is a lot like dieting. Of course there are more "perfect" eating plans out there, but let's face it: Most people do not have to keep a perfect diet. The "best" diet is that you care.
Payment of debt is similar. Be honest, what a budget that fits your personality and keeps you motivated. You will pay more interest if you do not follow your plan for paying the debt.
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