Most of those who juggle a few unpaid loans, do not know how to properly conduct their home money. There are many wrong ways to repay loans and one right way – to divide payments on loans.
90% of people with multiple credits have one or several credit cards. Studies show that most people with valid cards pay extra interest because of an irrational approach to the distribution of payments.
Instead of paying more on a card with a high interest rate in the first place – as all financial experts recommend, people send too much of their money to cards with low interest rates and too little to cards with expensive balance. As a result, they pay more out of pocket for the duration of all credits.
Two effective ways to repay loans
Snowball method. In order for this method to work, you need to pay great attention to the loan with the smallest balance. This does not mean that you need to forget about the other loans – nobody canceled the obligatory payment. This means that all additional funds must be directed to this card, credit or loan. Then go for a loan with a large balance and so on.
Studies have shown that the so-called snowball method is very effective. The thing is that by closing a loan completely, a person receives a powerful motivation to continue in a given direction and gradually get rid of loans.
The second method is called “Avalanche”. Here everything is even easier. You choose the loan with the largest balance or the largest rate, as a result of which, every month you have to make large payments, most of which are spent only on interest. Aiming at such a loan, you should direct all the “extra” money in the direction of its cancellation. Thus, with each month you will pay less and less (especially for credit cards, payment for which is recalculated every month, and sometimes every day).
Unfortunately, instead of using one of the methods, borrowers share their payments somewhat illogical. For example, they can divide their payments 50 to 50 between loans. The most common mistake is to make the minimum payments and think that you are doing everything right.
Credit cards, loans, and loans should be closed alternately
It is not a good idea to present all loan balances as one big loan and try to extinguish everyone equally. Most often, people get upset the more, the more the balance on the loan, which must be repaid. But do not hurry before planning your payments. It is better to carefully calculate and find out which loan is the most expensive and start closing it first.
If you really have the desire to do away with loans with the least financial losses, it’s best to make as many payments as you can afford in favor of loans with the highest interest rate.