Debt Payoff Calculator

Key terms for the debt payoff calculator

Creditor

This is the financial institution or lender to which you owe money.

Balance

Include the current outstanding balance for each of your credit accounts. The balance on personal loans, auto loans, mortgages and home equity loans is the amount you still owe, excluding future interest or other fees.

Minimum payment

This is the lowest amount you can pay in dollars each month to your credit provider to keep your account in good standing. For credit cards, this may be a percentage of the outstanding balance, a minimum amount in dollars, or both. This is the fixed amount you pay each month for loans and mortgages.

Actual payment

This is the monthly amount you pay off to bring down your credit card and loan balances. Many lenders allow you to overpay on mortgages and loans to reduce your balance faster.

Interest rate

This is the amount lenders charge to borrow money. It’s what you pay on top of the principal amount of a loan.

Additional debt payments

These are the amounts you pay in addition to the required amounts each month. To help you pay down your credit balances faster, the calculator also considers extra money you can set aside every month to pay lenders.

That may not be possible for everyone. However, you may be able to make a one-time lump-sum payment to bring down your credit balances if you sell an asset or receive inheritance, for example.

Debt ordering

For this calculator, debt ordering is used to determine the best order for repaying debts.

You have three choices:

• Lowest to highest balance
• Highest to lowest interest rate
• Shortest to longest payoff period

Interest earned on new savings

Whichever way you choose to prioritize paying down debt, you’ll free up cash over time as you pay less servicing debt each month. The calculator determines how much interest you’ll earn on those savings if you invest them.

What is the strategy behind this debt payoff calculator?

Here’s how the calculator works:

• It orders your credit accounts by the interest rate you pay on each account, with the highest interest rate first.
• It then assumes you’ll make the minimum repayment, not the actual payment you entered, on each account every month.
• If you tell the calculator you have extra money you can use to pay down your debt, it uses that additional cash to pay down the debt with the highest interest rate first.
• Once the first debt is paid off, the calculator focuses on repaying the debt with the next-highest interest rate.
• It keeps doing this until all of your debts are cleared.

What are other strategies for paying off debt?

Here are some other popular strategies for paying off debt:

Debt snowball method

The debt snowball method focuses on paying down debts with the smallest balances first.

Balance transfer credit card method

Using balance transfer credit cards can significantly reduce the interest you pay. This approach can be particularly suitable if you’re managing multiple credit cards, mainly if many of them charge high interest rates.

Many balance transfer cards offer a promotional period, ranging from a few months to a couple of years, with low or zero interest. Once you have opened your account, you transfer all of your other credit card balances onto the card. Instead of paying the high interest as you were before, you pay low or zero interest on those balances for the promotional period.

Before doing this, you should ensure you know what the standard interest rate on the balance transfer card will be once the promotional period expires. It might be higher than the interest rates you’re paying now, meaning that if you stick with the card, the savings you make during the promotional period will be eroded over time.

Debt consolidation

With a debt consolidation loan, you arrange a new loan to pay off your current debts.

There are three major benefits to this approach:

• The interest rate on the new loan is often much lower.
• You can borrow over many years, meaning that, depending on the interest rate charged, your monthly payments are lower.
• You have only one monthly payment to manage each month.

If you secure a debt consolidation loan against equity in your home, you may benefit from an even lower interest rate because you’ve provided collateral to your lender. The disadvantage of this, however, is that your home may be at risk of repossession if you default on the loan.