Let’s walk through an example to see the debt payoff calculator in action. Sandy Spender currently has 4 debts, which include:
- Auto loan with a balance of $4,000 and an interest rate of 8%
- Credit card #1 with a balance of $2,500 and an interest rate of 17%
- Student loans with a balance of $7,000 and an interest rate of 4%
- Credit card #2 with a balance of $500 and an interest rate of 16%
Sandy is currently putting $375 a month toward debt and can afford an extra $200 monthly with proper budgeting. By sending that extra $200 each month to the smallest debt first (the debt snowball approach), Sandy can save $981 in interest. But with that extra money funneled toward the highest-interest debt first (the debt avalanche approach), Sandy can save $984 in interest.
Plus, Sandy discovers that she can get out of debt
24 months sooner by committing to a steady repayment plan. Of course, it will still take her several years to reach the end goal of debt freedom, but with the help of the debt payment calculator, Sandy now has a clear debt payoff schedule and understands the immense savings possible with sticking to a steady payment plan.
Calculating debt payoff amounts can be tricky. And that’s because when you begin to make larger payments toward debt, you’ll end up paying less in interest over time. It’s wise to use a debt payoff calculator to help you understand the potential savings of paying back what you owe sooner.
For example, let’s say you are paying an installment loan of $1,000. The loan charges 12% interest and has a one-year repayment term. If you pay the loan over the 12-month term, you’ll make monthly payments of $89 and end up paying back a total of $1,068.
But if you wanted to pay off the debt early, say in month two, you’d end up only paying a total of $1,015, or about $15 in interest, leading to savings of more than $50 over the life of the loan.