When attempting to pay off debts, consumers are often at a loss as to which debt to start paying off first. They question whether settling smaller debts is better than making a dent in the capital of larger debts, or whether their money would be better spent paying off larger debts. There is no right or wrong answer when it comes to which debt to pay off first, each payment plan is based on the needs and aspirations of the consumer.
One of the most popular debt payment methods is called the Snowball Method. It entails using extra money to pay off the smallest debt first, and once that debt is settled, using the minimum amount due to settle the second smallest debt. Continuing this way, the consumer works up to the largest debt and pays off other debts faster and more efficiently. It is a very useful method for consumers who have numerous debts that need settling.
If this method does not appeal to the consumer, they should consider paying off debts that carry the highest interest rate first. These could be credit cards or store accounts. By settling accounts with high interest rates first, the consumer saves a lot of money in the long. They can then use this money to settle debts with smaller interest rates.
However if a consumer only has long term debts, it is advised to find out which long term debt can be paid up first i.e. a home loan or vehicle finance. Then attack one long term debt at a time, whilst paying the minimum on other debts. Paying extra will reduce compound interest and assist the consumer in paying their debts off sooner.
There is no specific formula to pay off debts, it is better that consumers consider their own needs and debt structures and choose which method works for their budget and long term financial goals.
Article written by: Andrea van Tonder 06-2013