What is it?
It’s a debt repayment strategy where you pay off the higher interest rate debt first, then move on to lower interest debts.
How does it work?
This method works by first listing out all the debts you have in the order of higher interest rates to lower interest rates and allocating your debt repayment amount to the higher interest debt in addition to the minimum amount paid to all the existing debts.
Example
Lets say you got $100,200,300,400 worth of debt with interest rates 7,8,9,10%.
Create a list with the highest rate being at the top and the lowest being at the lower end.
So now this becomes first 10%, the second 9% and so on.
Once you clear your higher interest rate debt, the first debts money + minimum payment amount will be paid to the second debt which will be much easier to clear because the first debts amount will be higher and it can easily clear off the next ones.
Pros
- Helps you save on potential higher interest payments over the long term.
2. Debt repayment gets easier once the first debt is cleared.
Cons
- It can be difficult to pay off the higher interest rate debt because it will cause a huge dent in your budget.
2. It involves comparing interest rates and APRs which can be tricky for new loan takers.