Debt Payoff Calculator Methodology
This document outlines the monthly compounding calculations, amortization loops, payment waterfall algorithms, and interest savings logic used across our Debt Payoff tools.
1. Monthly Interest Accrual Logic
Interest on outstanding revolving credit or term loans is computed monthly using the effective monthly rate:
The minimum monthly payment first covers the accrued monthly interest; any excess reduces the principal balance.
2. Avalanche vs Snowball Waterfall Execution
- Debt Avalanche: Extra payments are directed to the loan with the highest Annual Percentage Rate (APR). Mathematically minimizes total interest expense.
- Debt Snowball: Extra payments are directed to the loan with the lowest absolute balance. Maximizes psychological momentum through rapid account closures.
Once a debt is completely paid off, its entire monthly payment (minimum due plus extra payment) rolls over into the next target debt until all debts are cleared.
3. Capping & Safety Boundaries
Our simulation engine enforces a 360-month (30-year) cap to prevent infinite loops on loans where minimum payments fail to cover monthly accrued interest (negative amortization).
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