Simple Example Of Loan

An example of the debt-snowball method in action is shown below.
A person has the following amounts of debt and additional funds available to pay debt (the debt is listed with the smallest balance first, as recommended by the method):
• Credit Card A - $250 balance - $25/month minimum
• Credit Card B - $500 balance - $26/month minimum
• Car Payment - $2500 balance - $150/month minimum
• Loan - $5000 balance - $200/month minimum
• The person has an additional $100/month which can be devoted to repayment of debt.
Under the debt-snowball method, payments for the first two months would be made to debtors as follows:
• Credit Card A - $125 ($25/month minimum + $100 additional available)
• Credit Card B - $26/month minimum
• Car Payment - $150/month minimum
• Loan - $200/month minimum
After two months (presuming the person has not added to the balances, which would defeat the purpose of debt reduction), Credit Card A would be paid in full, and the remaining balances as follows:
• Credit Card B - $448
• Car Payment - $2200
• Loan - $4600
The person would then take the $125 previously used to pay off Credit Card A and apply it as additional payment to the Credit Card B balance, which would make payments for the next three months as follows:
• Credit Card B - $151 ($26/month minimum + $125 additional available)
• Car Payment - $150/month minimum
• Loan - $200/month minimum
After three months Credit Card B would be paid in full (the final payment would be $146), and the remaining balances would be as follows:
• Car Payment - $1750
• Loan - $4000
The person would then take the $151 previously used to pay off Credit Card B and apply it as additional payment to the car loan balance, which would make payments as follows:
• Car Payment - $301 ($150/month minimum + $151 additional available)
• Loan - $200/month minimum
It would take six months to pay the car loan (the final payment being $245), whereupon the person would then make payments of $501/month toward the loan (which would have a $2800 balance) for six months (with the last payment at $295).
Thus in 15 months the person has repaid four loans, with two of them being paid in a mere five months and three within one year.
Loan Then Loan Then Loan