Mastering the art of debt repayment has been a gradual learning process for me. From my upbringing until now, I continuously strive to improve my approach and find more efficient ways to tackle debt. Though it may be tough, always keep in mind the ultimate reward: you will be able to save for your lifelong dreams or even embark on them immediately. Whether it's going on a trip, purchasing a car, or acquiring/building your dream home, there are various strategies to achieve this, and my goal is to help you achieve it.
Disclaimer
Please keep in mind that I am not a financial advisor, I am not a lawyer, and I am not your real estate agent. The information you will see below is examples from my personal and professional experience. I hope these examples provide you with ideas on how to take action in your own life and serve as conversation starters with the professionals who are currently or will be assisting you in reaching your goals.
Before Getting Started
In today's blog post, we will discuss strategies for paying off debt that involves Simple Interest. Simple Interest refers to interest on a debt that will accrue daily, and it is charged on a monthly basis. You can find more information about it here. In the upcoming blog posts, we will explore the various calculation methods employed by different companies to determine debt payments and interest, such as compound or add-on interest. For now, let's focus on Simple Interest payments, which are commonly utilized by a range of loans, including personal, car, mortgage, and student loans.
Welcome to a guide to pay off simple interest loans!
First, I gather all my loan accounts with outstanding debt and assess each one individually, taking note of their respective interest rates.
To improve visualization and organization, I access my Google Drive and open Google Sheets. I create columns in the spreadsheet to input the debt amount, interest rate, and due date for each account. This allows me to have a clear overview of my debts and better manage them.
This is a screenshot of how it looks like:
Why each column is important
Due date
To ensure that you have sufficient funds at the required time to repay the debt, while also accounting for the number of days between payment deadlines to calculate the total interest payment.
Outstanding Balance
This will serve as the foundation for all calculations.
Interest Rate
Being aware of the interest rate will help you to determine the additional amount you will need to pay in addition to the borrowed sum. It's important to note that if your loan utilizes an Annual Percentage Rate (APR), this is the interest rate you should use when calculating the daily interest charge.
Total Days of Accrued Interest:
To determine the daily interest charge, it is necessary to calculate the number of days in the previous month. Considering the counting began in the month prior, knowing the precise number of days in that month will assist in accurate calculations of the accrued interest.
Daily Amount
To determine the daily rate, multiply the total owed amount by the interest percentage and divide it by the total number of days in a year (365).
Example:
For instance, if you owe $7,387.98
And your interest rate is 22%
Multiply $7,387.98 by 0.22 = $1,625.34 (annual interest)
Divide $1,625.34 by 365
You will be paying approximately $4.45 per day.
(Keep in mind that this calculation should be performed monthly, as both the outstanding balance and the daily interest amount vary each month.)
Total Interest
To calculate the total interest for a specific month, multiply the number of days between payment periods by the daily accrued interest amount.
Using the example provided with a total debt of $7,387.98 and an interest rate of 22%:
If your monthly payment for the debt was made on June 2nd, and the next payment is due on July 2nd, there are 30 days between payments (June has 30 days). Multiply the daily interest amount of $4.45 by 30, which gives a total interest of $133.50 that you will pay on July 2nd.
Total Payment
This represents the agreed-upon amount that you are required to pay each month as the minimum payment (or the total you paid that month). In this case, let’s pretend it’s $350.00.
Total Balance at the End of the Payment
This refers to the total amount that remains outstanding after making your monthly payment. It represents the end-of-period balance.
Using the example provided, to calculate this amount, you would add the original owed amount of $7,387.98 to the total accrued interest for the month, which is $133.50. This gives a total of $7,521.48. Then, subtract any additional payments made during the period, such as $350, resulting in a balance of $7,171.48.
This value represents the total amount owed at the end of the payment period. You can use this figure to recalculate the new daily accrued interest and determine the balance at the end of subsequent periods.
Number of Days Until Next Payment:
Counting the days until the next payment period is beneficial as it aids in making accurate calculations for the upcoming payment period.
How long it will take to become debt-free if you only make the minimum payments based on the examples provided
Assuming the initial debt is $7,387.98 with an interest rate of 22%, and you make the minimum monthly payment of $350.00:
The impact of making extra payments on certain random months. You will observe that by doing so, you can reduce the duration of your loan by one month and decrease the total interest paid by $103.5.
Illustration of the impact of paying an extra $50 on each payment:
By paying an extra $50 on each payment, you will shorten the life of the loan by five months and save $325.60 in interest over the course of the loan. This example demonstrates the significant impact of making consistent additional payments in accelerating debt repayment and reducing the overall interest paid.
Lastly, let's explore the impact of doubling the monthly payments:
By doubling the payments based on the numbers in this example, you will effectively reduce the loan term by 16 months (equivalent to one year and four months) and save a total of $1,145.79 in interest. Doubling the payments significantly accelerates the debt repayment process and leads to substantial savings in interest charges.
Conclusion:
In conclusion, mastering the art of debt repayment, especially for loans with simple interest calculations, is a crucial step toward achieving financial freedom. Here are the key takeaways from today:
Prioritize High-Interest Debt: Begin by focusing on loans with the highest interest rates to minimize overall interest payments.
Organize and Visualize: Use tools like Google Sheets to organize and visualize your outstanding debts, interest rates, and due dates. This helps you gain a clear overview and better manage your repayments.
Daily Interest Calculation: Understand the daily interest calculation method for simple interest loans. This involves assessing factors like outstanding balance, interest rate, and the number of days in a month.
Optimize Repayment Strategies: Explore various repayment scenarios, such as making extra payments or doubling monthly payments, to significantly reduce the loan term and overall interest paid.
Consistent Additional Payments: Making additional payments consistently, even if it's a small extra amount, can have a substantial impact on accelerating debt repayment.
Practical Benefits for You:
Savings: By adopting effective repayment strategies, you can save significantly on interest payments, putting more money back in your pocket.
Accelerated Debt Repayment: Learn how to shorten the life of your loan and achieve financial freedom sooner by making informed and strategic repayment decisions.
Realistic Financial Planning: Utilize tools like Google Sheets for realistic financial planning, considering different scenarios and setting ambitious yet achievable goals.
Preview To Our Next Blog
I hope this guide provides you with actionable insights and empowers you on your journey to becoming debt-free. Stay tuned for our next blog, where we'll dive into effective strategies for paying off credit cards. Your path to financial well-being starts with informed and intentional debt management. See you soon!
Citations:
1. Hayes, Adam. “Simple Interest: Who Benefits, With Formula and Example.” Investopedia, May 2023, www.investopedia.com/terms/s/simple_interest.asp.
2. Robertson, Colin. “Mortgage Due Dates 101: Is There Really a Grace Period?” The Truth About Mortgage, Aug. 2021, www.thetruthaboutmortgage.com/mortgage-due-dates-101.
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