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Repaying Debt Using the Interest Rate Method

repaying debt using the interest rate method, debt, debt repayment, debt repayment methods, save money, save interest, reduce interest, debt free

This week we are looking at how you can use the Interest Rate Method for paying down debt.  This method works in a different way to the Snowball Method and takes a more mathematical approach.

Repaying Debt using the Interest Rate Method

As with any method of debt repayment, it does assume that you have reduced your outgoings to the minimum and are in a situation where you have created some ‘spare’ income to use for debt repayment.

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What is the Interest Rate Method?

With the Interest Rate method, you list your debts in order of their interest rate.  List them from highest to lowest.  As with the Snowball method, you still focus on just one debt at a time, but this time you start repaying the debt with the highest interest rate, regardless of balance.  I’ll give you an example:

Loan
Interest Rate
Balance
Minimum Payment
Bank Loan 1
27%
£7500
£90
Credit Card
24.5%
£1250
£35
Bank Loan 2
10.5%
£2385
£60

Those who favour this method do so because it reduces the amount of interest you will end up paying over the length of the loans.  A negative to this method can be that as you may have a large balance on a high interest debt, it can seem like it is taking ages for you to make any progress and some may lose motivation.

How Does the Interest Rate Method Work?

What the Interest Rate method requires you to do is pay only the minimum payments on the Credit Card and Bank Loan 2, whilst diverting as much spare cash as you can manage to Bank Loan 1.

Loan
Interest Rate
Balance
Minimum Payment
Additional payment
Bank Loan (1)
27%
£7500
£90
£90 + £50 = £140
Credit Card
24.5%
£1250
£35
£35
Bank Loan (2)
10.5%
£2385
£60
£60

Once you have completely cleared the Bank Loan 1 debt (as this was the debt at the highest interest rate) the money you were using to pay this off moves on to the next debt on the list in addition to the minimum payment.

Loan
Interest Rate
Balance
Minimum Payment
Additional payment
Bank Loan (1)
27%
£0
£0
REPAID
Credit Card
24.5%
£1250
£35
£35 + £140 = £175
Bank Loan (2)
10.5%
£2385
£60
£60

You would now be paying £175 per month on debt 2 rather than just the £35 minimum payment.  Once debt 2 was repaid, you would then move this money on to debt 3 and so on, until all your debt was repaid.

Important Points to Note with the Interest Rate Method

Is this the Right Method for you?

It is important to remember that different people will prefer different methods.  Everybody’s circumstances are unique.  You must find the way that works for you and which will keep you the most motivated.

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