Debt repayment strategies are not one-size-fits-all and each has their own benefits. It’s important to have a debt management plan that works for you. This article will talk about different types of debt, some of the different debt payoff strategies, and how to use Upsolve's Repayment Calculator.
Written by Attorney Serena Siew.
Updated July 26, 2021
For every type of debt, there’s a path to repayment. With Upsolve’s debt payoff calculator, you even have GPS. Additionally, you have this cheat sheet available that summarizes all types of debt and explains different methods to approach them. Not all debts are equal. Some result in repossession or foreclosure and others result in costly interest charges. It’s worth having DIY strategies like the snowball and avalanche methods in your arsenal before using the calculator. That way, you not only learn different ways to fight but also choose your battles wisely.
Types of Debt
It’s vital to understand two types of debt so you can know which debt to prioritize in your payment plan. There are unsecured debts like credit cards and medical bills and secured debts like car loans and home mortgages. Unsecured debts do not carry the threat of repossession or foreclosure. But if you neglect them, interest charges can be costly.
Unsecured debt is backed only by your promise to pay. Creditors can’t repossess your credit card or the vacation you charged on it. Medical bills, student loans, lines of credit, and personal loans are also unsecured debts. Because there’s nothing to repossess if you default or can’t make your payments, unsecured credit debt is riskier for lenders. That’s why credit card companies can charge high interest rates and sue you in court if you don’t pay.
Secured debt is backed by real or personal property. Examples of secured debt are auto loans, mortgages, secured credit cards, and home equity lines of credit (HELOC). Lenders have a right to seize and sell the property used as collateral for these loans if a borrower defaults on their payments.
This ability to recoup in case of default makes these debts more secure for lenders, which is why they usually have lower interest rates than unsecured debts do. For example, if you don’t pay your auto loan, you risk having your vehicle repossessed. Missed or late mortgage payments may lead to foreclosure. A secured credit card is backed by a deposit, so failure to make timely payments could result in the bank keeping the deposit. If you fail to make payments on a HELOC, it could lead to second mortgage foreclosure.
Debt Repayment Approaches
Getting out of debt means getting credit card balances off your credit report and improving your credit score. But debt repayment is not one-size-fits-all. It’s important to have a debt management plan that works for you. You could consider:
Seeking nonprofit credit counseling to arrive at a debt management plan
Consolidating your debts to one balance transfer credit card with 0% APR
Taking out a personal debt consolidation loan
Negotiating with your loan servicer for more favorable terms
Each strategy has its own benefits, but in general, sticking to a solid debt repayment plan can help you feel more secure in your financial situation. It can help you get more affordable monthly payments by increasing the length of your loan or getting a lower interest rate. It can also help you avoid late fees, which can add up and put you further behind. Making the minimum payments on all of your debts is a good start, but to get ahead, consider allocating any extra funds using the debt avalanche or snowball methods.
The debt avalanche method works best if you have high-interest debt. Using this method, you’ll prioritize paying down your high-interest loans first to save money in the long run on interest. Credit card debts with high annual percentage rates (APRs) are prime targets. Loans with lower, fixed interest rates like mortgages don’t need to be on your avalanche list.
For example, take the following credit card balances and APRs:
$5,000 at 19% APR
$3,000 at 17% APR
$7,000 at 15% APR
The avalanche would attack the $5,000 balance first because it has the highest interest rate. In addition to paying the minimums on all your debts, you’d put any extra money toward this payment each month. Once that’s paid in full, you’ll move on to the debt with the next-highest interest rate until you reach the debt with the lowest APR. Your savings in total interest could be huge.
The debt snowball works similarly by putting any extra money each month toward one debt. But with this method, you’ll pay off the debt with the lowest balance first regardless of the interest rate. Using the same example, you’d use any extra money to pay off the debt with a $3,000 balance first, which you can pay the most quickly. Then you’d pay off the $5,000 debt next and leave the $7,000 debt for last.
Debt Avalanche vs. Debt Snowball
The debt avalanche method makes sense from a purely financial perspective. Use it if you:
Like facing your biggest challenge first
Know that high interest rates can keep you in debt for years
Can stay focused without immediate positive reinforcement
Use the debt snowball if you:
Want to see short-term results
Stay motivated by early wins
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Debt Payoff Calculator
The first step to choosing a debt-reduction approach is to accurately calculate how much you’ll need for your monthly payments to repay the debt within your lifetime. The Upsolve Repayment Calculator can help you figure this out.
For each debt, enter the balance owed, interest rate, expected monthly payment, and your current age, and the calculator will tell you how old you’ll be when your debt is paid off, how many months it will take, and how much you can expect to pay in interest.
Let’s break down each component of the calculator.
Your current balance or outstanding balance tells you how much you owe on this loan today. You can find this information on your monthly statements.
The interest rate is the amount lenders charge on the principal for letting you borrow the money. Consumer loans use a variable known as APR, which is basically the annual rate of borrowing. It will be higher for higher-risk, unsecured loans and lower for secured debts.
Expected Monthly Payment
If you’re making minimum monthly payments, type this amount into the calculator as the expected monthly payment. If you’ve already budgeted to be able to pay more on a given debt, add this to the minimum payment and enter that amount. Doing this can help you see the debt avalanche or snowball method in action!
Your Current Age
The final part helps the algorithm calculate your age when your debt will be paid off.
Let’s say that you have the following mix of debts:
$1,500 medical expenses at 3% interest with a $50/mo minimum payment
$15,000 student loan at 6% interest with a $150/mo minimum payment
$22,000 car loan at 5% interest with a $200/mo minimum payment
$16,000 credit card balance at 17% APR with a $250/mo minimum payment
Let’s say that you want to use the debt snowball method to tackle these debts, which add up to $650 in monthly payments. You’re ahead of the game and you have $750 a month to put toward debt repayment. This means that you can allocate an extra $100 a month toward your debt with the lowest balance. In this case, that’s your medical debt of $1,500. Let’s put it into the Debt Repayment Calculator:
Balance owed: $1,500
Interest rate (Annual): 3%
Expected monthly payment: $150 (the $50 minimum payment, plus your extra $100)
Current age: 40
The calculator shows that it will take 11 months to pay off this debt, during which time you’ll pay $150 in interest. Once that’s knocked out, the snowball really starts to take effect. Now you’ll move to the debt with the next lowest balance: your student loan. When you were just paying the minimum payment of $150/month, the debt calculator showed it would take 138 months to pay off the debt and cost an extra $5,700 in interest. You’d be 51 years old when it was paid.
If you continued to make the minimum $150 payment during the 11 months you focused on your medical debt, your student loan balance would now be $13,350 ($15,000 - $1,650). But, since your medical debt is now paid off, you can funnel that additional $150 a month into your student loan payment and make a monthly payment of $300. Let’s run this adjustment through the Debt Repayment Calculator:
Balance owed: $13,350
Interest rate (Annual): 6%
Expected monthly payment: $300 (the $150 minimum payment, plus your extra $150)
Current age: 40
The debt calculator shows that it’s now only going to take you 51 months to pay off this loan, and you’ll pay only $1,950 extra in interest. It’ll be paid off when you’re 44 years old.
It’s important to understand the difference between secured and unsecured debt before making a repayment plan. Secured debts, like mortgages and car loans, are subject to seizure of property and are thus less risky to creditors. That’s why unsecured debts, like credit cards, have higher APRs. Interest charges are no joke.
If you’re falling behind on payments, don’t be afraid to ask your loan servicer for better terms. You could also consider a debt consolidation, balance transfer, HELOC, or debt management plan. Use the avalanche method to prioritize debts with the highest interest rates first or the snowball to attack the lowest balance first. Finally, use the Upsolve Calculator to find out how old you’ll be when you’ll be able to pay off the debt and how much you can expect to pay in interest. The result may inspire you to change your plans.