This **debt reduction calculator** can estimate either how quickly you can pay off your debt by paying extra or how much you need to pay per month to be debt free. Everything there is to know on how to reduce your debt is detailed below the calculation form.

## How to reduce debt?

There are 2 approaches when trying to reduce debts: one is to add extra regular payment to the current amount paid month by month and the other one is to set up a new term by which to be debt free.

- Regarding the option to
*add an extra amount to your monthly payment*must be said that it leads to paying early the debt and that it generates some savings in interest as well.

Let’s take the following example of someone who has left to pay a balance of $100,000 at an interest rate of 5% and with a current monthly payment of $1,500. We should analyze two scenarios:

- First scenario assumes that the person in question will continue paying the monthly payment of $1,500. In this case the person will be debt free after **6 years and 7 months, **while the total interest paid would be **$17,570.**

- Second scenario assumes that the person in question decides to add month by month the amount of $500 to the monthly payment of $1,500 which means she will pay each month a total of $2,000. In this case the person will pay off the loan in **4 years and 9 months**, while the total interest paid would be** $12,485.**

As it can easily be observed in this case both the total interest paid and the time in which the loan is paid entirely diminishes.

- Regarding the option to
*set up a new term to pay off the loan*must be said that will generate as well some savings in interest while the term to pay entirely the debt is the one desired and the monthly payment will increase in comparison to the current level.

Let’s take the example of someone who has left to pay a balance of $100,000 at an interest rate of 4% and with a current monthly payment of $1,300. We should check as well the two scenarios available:

- First scenario assumes that the person will continue paying the monthly payment of $1,300. In this case the debt owner will pay off the principal after** 7 years and 5 months, **while the total interest paid would be **$15,545.**

- Second scenario assumes that the person decides to negotiate a new term to pay off of 4 years. As a result of the term change the new monthly payment will be **$1,840 **while the total interest paid would be **$10,400**.

Even though increases the monthly payment, this method diminishes both the total interest paid and the time in which the loan is paid off. Both methods are supported by this *debt reduction calculator*.

## Just in case…understanding debt management

In case you owe one or more debts, credit cards and probably an auto loan then you definitely have to manage your debts in such a way to pay all of them with no delays month by month.

In case something goes wrong with your monthly budget you won’t be able to pay all of them, then you will most probably need to negotiate with your creditor a debt management plan.

It is a kind of written formal agreement signed by both parts by which you are allowed to have reduced monthly payments over a fixed period of time. The scope of this agreement is to help regain control of your finances.

## How does this debt reduction calculator work?

The tool can help you simulate what happens with your payment schedule if you decide to pay an extra amount of money on a monthly basis, or what happens if you decide to change the pay off term:

- By selecting the first option "What will happen if I pay extra" the calculator will estimate when you end up paying your balance and total interest paid by making extra payments as opposed to the current plan.
- By the second option "How to be debt-free after" the application will return you how much you will need to pay on a monthly basis in order to end up paying the principal by the new term specified.

The algorithm behind it uses the monthly compounding interest formula.

Please remember that this *debt reduction calculator* is made for hypothetical demonstrative purposes only while for a more detailed plan you should seek a financial professional service.

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