It’s essential to note that a repayment strategy that works for other people out there may not necessarily be the one that will work for you. Your unique loan repayment plan will depend on the type of debt you have. For instance, some types of loans, like student loans, may allow for deferment, forgiveness, or forbearance. Other loans, like credit card loans, may have more stringent terms.
No matter the kind of debt you owe, there are two standard practices for paying the debt down:
Either of these two options will help you pay off your loan but in different ways.
The avalanche method starts by ranking your loan debts, starting with the loan with the highest interest rate. This method focuses on paying off the loans with the highest interest rate first, while at the same time making the minimum monthly contributions towards the other loan balances. This strategy is best if you have a student loan and a credit card loan because interest rates are generally high on credit card loans.
On the other hand, this method entails listing your loan debts by total dollar amount and paying off starting with the smallest amounts first. If you want to enjoy the psychological benefits of paying off the debts—the satisfaction of getting the debts off your list, then this is the method to opt for. Many Americans who choose this strategy do so mainly because of the satisfaction they derive from clearing the small amount debts, which motivates and encourages them to work their way up in clearing the large amounts.
No matter the path you take towards paying down your debt. Always strive to make sacrifices that will allow you to allocate more than the minimum monthly payment required of you. One tip to help with this is to earmark all unexpected or extra incomes for loan repayments. It also helps if you cut down on groceries, eating out, and other luxuries.