Which debt repayment strategy is right for you?
Debt can be overwhelming, especially when you have multiple debts. This can make it challenging to determine where to focus your repayment efforts first. The longer you keep debts outstanding, the more interest you will pay overtime, which can really add up!
Everyone’s financial situation is different; therefore, debt repayment does not fall into a one-size-fits-all bucket. Carefully review your outstanding debts and the strategies here and choose the strategy that you feel will help you pay down debts quicker and achieve financial independence.
The Snowball Strategy
List all your debts, which may include loans, credit cards, mortgages, and other lines of credit with balances, from the smallest balance to the largest. For example, if you have three credit cards with balances of $1,000, $5,000, and $7,500, your strategy will be to pay them off in that order, respectively.
Under this strategy, you will continue to make the minimum payments on all debts but will contribute as much money as you can toward the debt with the lowest balance first. Once that debt is paid off, you focus on the debt with the second-lowest balance in your list. You will combine the amount you were paying on that now paid-off debt with the minimum payment you were paying on the second-lowest balance until paid off, while still paying the minimum payment on all other debts. Repeat the “snowball” until all your debts are paid off.
The Avalanche Strategy
Instead of paying off your debt from the smallest to largest balances as you would under the Snowball Strategy, this method will have you list your debts by interest rate, from highest to lowest. Higher interest rate debt may cost you more than those with lower interest rates. If you choose this strategy, continue to make the minimum payments on all debts, but focus on contributing extra on the debt with the highest interest rate first. After that debt is paid off, you will now focus on paying off the debt with the next highest interest rate and will be continue until all debts have been paid. With this strategy, you may reduce the interest that is owed, making this a cost-saving option.
The Consolidation Method
Debt consolidation may be an option if you have difficulty juggling multiple loans and their payments or have higher interest rates than debt consolidation loan rates. With a debt consolidation loan, the total amount of debt that you wish to repay is consolidated into a single loan. Typically, these loans have characteristics such as a single interest rate, monthly payment, term, and due date. Be mindful that while you may have a lower interest rate, the financial institution may impose additional origination fees, which may negate any savings you may be expecting.
The information in this article was obtained from various sources not associated with Adirondack Bank. While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. Adirondack Bank is not responsible for, and does not endorse or approve, either implicitly or explicitly, the information provided or the content of any third-party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. Adirondack Bank makes no guarantees of results from use of this information.
