Question

Debt	Interest Rate	Current Balance	Minimum Payment
MasterCard	19.9%	$600	$22
Visa	23.95%	$2,545	$60
Car	4.8%	$16,800	$465
Student Loan	6.8%	$18,400	$220
Electronics Store	22.65%	$1,015	$29
Loan from Dad	0%	$3,000	$20
Knee Surgery	6.2%	$5,000	$100

The above are debts you owe, the annual interest rate for those debts and the monthly payment. If you make $1,200 monthly payments on all your debt, how much is the interest cost on the final $1,200 of debt you pay using the Debt Snowball Method. (Hint: what is the rate of the last debt you will be paying on?)

Answer 1

Under Snowball method, payment of debts where smallest debt is cleared first and then second smallest debt and the largest debt is paid of at the last while paying minimum payments to other debts. It takes 45 month to get out of debt by Snowball method.

Using the Debt Snowball method, minimum payment of all the debts will be paid and then MasterCard debt is paid first and then Electronics Store debt will be paid. Student Loan will be paid at the last paying minimum payments to other debts.

Interest cost on the final $1,200 of debt = Interest rate of Student Loan = 6.8%

Interest cost on the final $1,200 of debt paid using the Debt Snowball Method is 6.8%.