Friday, November 14, 2008

How to Calculate How Long It Will Take to Pay Off Debt

An important long-term financial goal, such as saving up money for a first-time home purchase, can motivate you to get debt under control quickly. In the short-term, paying off debt in a timely fashion helps you to avoid default, save money on interest expenses and improve your future prospects for securing loan approval on good terms. Learn to review current loan statements and the strength of your current finances to calculate the amount of time it takes to pay off debt.

Instructions

    1

    Review your most recent loan statements and agreements for important time tables. A credit card statement will present the amount of time it takes to pay off the balance if you were to continue making minimum payments. Your current mortgage bill will also feature the time left until its maturity date if you continue to pay the loan off with minimum payments.

    2

    Identify the monthly loan payment formula as M=P[i(1+i)^n]/[(1+i)^n-1]. In this formula, n is taken as an exponent and represents the number of monthly payments made. Meanwhile, M defines your monthly payment, P is your loan principal and i identifies your annual interest rate divided by 12. If your annual interest rate is 12 percent, i would then be .01 (.12/12). You will ultimately solve for n by hand, or pull up an online financial calculator to determine the amount of time it takes to pay off a particular debt.

    3

    List each outstanding debt according to principal balance and interest rates. You will prioritize debt payments according to interest rates. For example, you should spend an extra $1,000 to pay down a credit card balance that carries an 18 percent interest rate instead of using the money to make an additional principal payment on a 5-percent, 30-year mortgage.

    4

    Analyze your current assets in order to locate sources of cash that can be spent to pay off debt. Cash reserves that are in excess of six months worth of your living expenses may be used to reduce debt principal. You may also consider selling off under performing stocks and bonds to raise money to make debt payments.

    5

    Review your recent bank statements to calculate the amount of free monthly cash flow that is available to make regular payments on each debt. Free cash flow is the amount of money that is left over after meeting your monthly expenses. You will budget to make minimum payments on low-interest rate debt to preserve cash for quickly paying off expensive balances.

    6

    Pull up an online credit calculator and toggle through the numbers to determine the amount of time that it takes to pay off debt. With the credit calculator, you can input a debt interest rate and the size of your regular payments to figure out a timeline for paying off a certain principal balance.

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