The calculator below estimates the time required to pay off one or more debts. It also offers users the most cost-effective payment sequence, with the option to add additional payments. This calculator uses the debt avalanche method, considered the most cost-effective repayment strategy from a financial perspective.
Debt Payoff Planner
Loans and debt are basic economic activities in modern society. Businesses, individuals, and even governments incur debt to maintain their operations. Most people will incur loans throughout their lives, whether mortgages, student loans, car loans, credit card debt, or other obligations.
If used responsibly, debt can help people purchase homes, buy cars, and keep their lives afloat. However, debt can also lead to high levels of stress. This can cause serious mental, physical, and medical problems over time. Furthermore, excessive debt, especially credit card debt, can lead people to overspend, costing them significant amounts of money in interest. It can also interfere with financial planning, lower credit scores, and, over time, harm their personal lives.
Pay off your debts early
Most people like the feeling of being debt-free and, when possible, pay them off early. A common way to pay off loans more quickly is to make additional payments beyond the required minimum monthly payments.
Borrowers can make single additional payments or pay additional amounts each month or year. These additional payments will reduce the principal owed. They also advance the repayment date and reduce the interest payable over the life of the loan.
The Debt Payoff Calculator above allows for making a single additional payment or multiple periodic additional payments, either separately or in combination.
Before deciding to pay off a debt early, borrowers should find out if the loan includes a prepayment penalty and evaluate whether paying off the debt more quickly is a wise financial decision.
While making additional payments on a loan can be helpful, in most cases it is unnecessary, and the opportunity costs should be considered. For example, an emergency fund can provide peace of mind in the event of incidents such as medical emergencies or car accidents. Furthermore, stocks that perform well during good years can offer a greater financial benefit than additional payments on a low-interest debt.
The general consensus is that borrowers should pay off high-interest debts, such as credit card balances, as soon as possible. They should then assess their financial situation to decide whether to make additional payments on low-interest debts, such as a mortgage.
How to Pay Off Debt Early
Once borrowers decide to pay off their debt early, they may find it difficult to act. Achieving this goal often requires strong financial discipline. Finding additional funds to pay off debt often involves actions such as creating a budget, cutting unnecessary expenses, selling unwanted items, and making lifestyle changes.
Borrowers should also utilize appropriate strategies to pay off their debts. Listed below are some of the most common techniques:
Debt Avalanche
This debt repayment method results in the lowest total interest cost. It prioritizes paying off debts with the highest interest rates, paying the minimum amount required on each debt. This continues like an avalanche, with the debt with the highest interest rate descending until the borrower pays off all debts and the avalanche ends.
In other words, a credit card with an 18% interest rate will take priority over a 5% mortgage or a 12% personal loan, regardless of the outstanding balance. The debt payoff calculator uses this method and in the results, orders debts from top to bottom, starting with the highest interest rates first.
Debt Snowball
In contrast, this debt repayment method starts with the smallest debt, regardless of the interest rate. As smaller debts are paid off, the borrower allocates payments to the next smallest amount.
This method typically results in borrowers paying more interest than with the debt avalanche method. However, the resulting boost in confidence (even if small) can provide a significant emotional boost that can allow a debtor to stay motivated or even make some sacrifices to contribute more to paying off their remaining debts. The Debt Payoff Calculator does not use this method.
Debt Consolidation
Debt consolidation involves taking out a single, larger loan. This is typically a home equity loan, a personal loan, or a balance transfer credit card. Borrowers use that new loan (usually with a lower interest rate) to pay off all existing, smaller debts.
Debt consolidation is most useful for paying off higher-interest debts, such as credit card balances. This can reduce the monthly payment in many situations, making debt settlement less stressful. Additionally, having one monthly payment instead of several can simplify the repayment process.
For more information or to perform calculations related to debt consolidation, use the Debt Consolidation Calculator.
Alternative Methods for Managing Mounting Debt
Sometimes, borrowers may find themselves in situations where they simply cannot pay their mounting debts. Lack of financial resources, a serious illness, and a negative mindset are some of the reasons.
In the U.S., borrowers have alternative methods that can save their situation. They should carefully weigh these options and carefully evaluate whether or not to use them, as many of these methods could make the borrower’s situation worse. Higher costs, lower credit scores, and additional debt are some of the possible consequences. For these reasons, some personal financial advisors suggest avoiding the options listed below at all costs.
Debt Management
Debt management involves first consulting with a credit counselor from a credit counseling agency. The U.S. Department of Justice publishes a list of approved credit counseling agencies by state.
Credit counselors review each debtor’s financial situation. From there, they typically contact creditors and negotiate with them to lower their clients’ interest rates or monthly payments.
Let’s say they find a debt management plan viable. In that case, the credit counselor will make the debtor an offer. The agency will take over all their debts monthly and pay each creditor individually. In turn, the agency requires the debtor to make a monthly payment to the agency (rather than several to each creditor) and possibly other fees. Credit counselors also typically require debtors to avoid opening new lines of credit and canceling their credit cards to avoid accumulating new debt.
Debt management can offer relief from the constant calls, emails, and letters from creditors. It offers the greatest benefit to those disciplined enough to stick to payment plans and gradually reduce debt over the long term. While debt management may negatively impact credit scores initially, it prevents the more serious effects that would likely result from debt settlement or bankruptcy.
Debt Settlement
Debt settlement involves negotiating with creditors to settle an existing debt for less than the amount owed. This typically involves a 45% to 50% debt reduction, not including an additional fee. Borrowers who opt for debt settlement typically pay 20% of the outstanding balance in fees.
Debt settlement often has a significant negative impact on credit scores and reports. Furthermore, the IRS treats forgiven debts as income, requiring payment of income taxes to the IRS.
Bankruptcy
Bankruptcy is the legal situation of a person or entity that is unable to pay their debts to creditors. While there are six types of bankruptcy, generally only two apply to individual debtors.
The first and most common type is Chapter 7. The primary purpose of a Chapter 7 bankruptcy is to discharge debts, freeing the filer from the legal obligation to pay them. However, this will likely involve the sale of some personal assets to pay creditors. Furthermore, this process cannot discharge obligations such as tax debts, student loan debts, child support, or alimony.
Those who file for Chapter 7 should expect the process to take between six months and a year.
The second type is Chapter 13, which constitutes a reorganization. It establishes a repayment plan that can last between three and five years.
Once the borrower completes the repayment plan, any remaining debt is discharged. Unlike Chapter 7, Chapter 13 bankruptcy often allows for the retention of valuable assets rather than having them sold by the court.
A person’s assets and income generally determine whether a borrower files for Chapter 7 or Chapter 13 bankruptcy. However, filing for bankruptcy will negatively affect credit history for up to a decade. This makes it difficult to apply for loans, mortgages, or new credit cards. Landlords and future employers generally view bankruptcy as unfavorable, and it can affect future rental or job applications.