For the purpose of this article I am going to describe how to apply "The Debt Snowball" to a person who has five payday loans that equal $1500. The interest rate on loans is 15% every two weeks. Already it will cost this person $225 every two weeks just to keep the loan current. That money doesn't even make a payment on the original loan. This is the trap that makes payday loans so dangerous, however with a little hard work you can eliminate these debts in three to four months.
The first thing you will have to do is find a way to increase your income. Chances are if your using payday loans your probably already stretched out financially. You wont need much, between 75-100 dollars a week will be enough. Any part time job should gain you the necessary income.
The Process
So your loans equal $1500 with a 15% due every two weeks. You begin by making your interest payment of $225. Then, with the extra $75 a week you made, you make a payment on the loan. Since the loan renews every two weeks you should have $150 to apply to the loan's principal. Your total payment equals $375. This will be the payment you want to make every time your loans renew.
Now for the snowball affect. In two weeks when your loans are due again your principal balance will $1350, since you made the payment of $150 the time before. Your interest this time will be $202.50. The idea is to add the money you saved on interest to the payment you are making on the principal. So take the $22.50 you saved on the interest and add it your $150 principal payment. Now you are making a payment of $172.50. Once again your total payment is $375
When you return in two weeks your balance will be lower again. This time $1177.50. See how it's shrank larger than last time. It will continue to do so at larger rates. This time your interest is $176.62. Subtract that from $375 payment you want to make and you are left with a principal payment $198.38.
I'm going to expedite the process from here to the end. We've already discussed the payments for the first four weeks and are left with a balance of $979.12.
Week 6
Balance-$979.12
Interest payment - $146.87
Principal payment - $228.13
Week 8
Balance- $750.99
Interest payment - $112.65
Principal payment - $262.35
Week 10
Balance - $488.64
Interest payment - $73.30
Principal payment - $301.70
Week 12
Balance - $186.94
Interest payment - $28.04
Principal payment - $186.94
Congratulations, you are now debt free, in only three months nonetheless. You can see that things start out slow at first but quickly snowballs to a point where your principal payments are dwarfing your interest. I hope this program helps you gain financial freedom. If you can, you should keep trying to make the increased income an invest this into a 401K, a certified deposit, or preffered stocks so you can start making interest work for you instead of against you. Please email me with any success stories or other comments you may have.
Chris
