In the context of the nine methods tested, My Debt Killer identifies the best payoff method as the method which results in the lowest total interest paid when all loans are paid off.
To understand the payoff methods it is necsssary to define a variable called Excess. Excess is the total you can pay each month minus the sum of the minimum monthly payments of your active loans. Excess is how much money you have left each month after you have paid the minimum payments on all loans. My Debt Killer employs nine payoff methods to find the total interest for each method after all loans are paid off. Each payoff method uses a single rule to distribute the Excess at each monthly payment. These rules require that Excess be distributed every month in each of these ways:
- To the active loan with the the highest rate. The Avalanche Method
- To the active loan with the smallest balance. A variation of Snowball Method
- To the active loan with the largest balance.
- Proportional to the magnitued of each active loan's interest rate.
- To the active loan with the highest interest payment. The highest interest payment does not always occure in the loan with the highest interest rate. A loan with a large balance can have a higher interest payment than a loan with a lower balance and a higher interest rate.
- Proportional to the magnitued of each active loan's interest payment.
- Equally among active loans.
- Among active loans acording to the size of the initial balances -- Largest to Smallest.
- Among active loans acording to the size of the initial balances -- Smallest to Largest. The Snowball Method
The last payment on a loan is usually less than the regular monthly payment. When a loan is paid off, the difference between the last payment and the regular monthly payment is applied to the remaining active loans according to the payoff method that is being evaluated.
Using the best payoff method of the nine options as a baseline, the user is allowed to attempt to decrease the total interest payment even more by running multiple scenarios.
If you would like to dive into the math visit the Math Considerations page.