Why you need a repayment plan
Debt feels heavier when it is a vague worry. A plan turns it into a list of numbers and dates. You can see what you owe, what it costs you each month, and when it can end. The goal is not to feel guilty. It is to make steady, deliberate progress.
Step 1: List every debt
Write down each debt in one place. For each, record:
- Who you owe, and what it was for.
- The total balance still owed.
- The interest rate, and whether it is yearly or monthly.
- The minimum payment and the due date.
- Any fees or penalties for late or early payment.
If you do not know a rate, check your statement, agreement or the lender directly. Do not guess. Include informal debts too, such as money owed to family or friends, even if there is no interest.
Step 2: Find out how much you can pay
Work out how much of your income can go to debt each month after your essential costs. Our guide to creating a monthly budget shows how. The total of all your minimum payments is your starting point. Anything you can add beyond that is your extra payment.
Always pay at least the minimum on every debt. Missing payments can lead to penalties and extra interest.
Step 3: Keep a small cushion
Before putting every spare naira into debt, keep a small starter emergency fund. Without one, a surprise bill can push you to borrow again. See our guide to building an emergency fund.
Step 4: Choose a repayment method
There are two popular ways to order your extra payments. Both start the same way: pay the minimum on every debt, then put all the extra money on one chosen debt.
- Avalanche: put the extra on the debt with the highest interest rate first. This usually costs the least interest overall.
- Snowball: put the extra on the debt with the smallest balance first. This gives quicker wins, which helps some people stay motivated.
When a debt is cleared, move its whole payment onto the next one. The payments snowball, so progress speeds up.
A worked example
This example uses Nigerian naira (₦). The balances and interest rates are made up for teaching. They are not real offers, and real rates vary. Interest is shown per month.
| Debt | Balance | Interest per month | Minimum payment |
|---|---|---|---|
| Phone loan | ₦60,000 | 5% | ₦10,000 |
| Store credit | ₦40,000 | 3% | ₦5,000 |
| Personal loan | ₦200,000 | 2% | ₦15,000 |
| Total | ₦300,000 | ₦30,000 |
Suppose the person can pay ₦40,000 a month in total. That is the ₦30,000 of minimums plus ₦10,000 extra. The two methods choose different targets for that extra ₦10,000:
| Method | First target | Why |
|---|---|---|
| Avalanche | Phone loan | Highest rate (5% a month) |
| Snowball | Store credit | Smallest balance (₦40,000) |
To see why interest matters, look at one month of interest on each balance: the phone loan costs ₦60,000 × 5% = ₦3,000, the store credit ₦40,000 × 3% = ₦1,200, and the personal loan ₦200,000 × 2% = ₦4,000. Per naira owed, the phone loan is the most expensive, so avalanche attacks it first. Snowball would instead clear the store credit sooner, and free its ₦5,000 minimum for the next debt.
Which is better? Avalanche usually saves more interest, and snowball can be easier to stick with. The best plan is the one you will actually follow. These figures are only an example to show the method.
Work out what you can afford to pay each month with the Monthly Budget Calculator. To plan how long a goal takes once debts are cleared, try the Savings Goal Calculator.
Step 5: Stay on track
- Set up payments for just after you are paid, so the money is gone before you spend it.
- Review your plan every month and update the balances.
- Avoid taking on new debt while you repay the old.
- Put windfalls, such as bonuses, partly toward the target debt.
- Celebrate each cleared debt in a way that costs little.
If you cannot keep up with payments
Contact your lender early. Many will discuss a lower payment or a longer schedule, though terms vary and extra cost may apply. Read any new agreement carefully. If you are overwhelmed, consider speaking to a qualified, licensed adviser or a reputable debt counselling service in your country. Be careful with anyone who asks for fees up front or promises to make debts disappear.
Common mistakes
- Paying only the minimum on everything and never adding extra.
- Not knowing the interest rates.
- Borrowing from a new source to pay an old one without comparing the cost.
- Using all your savings and then having no cushion.
- Giving up after a missed month instead of restarting the plan.
Frequently asked questions
Avalanche or snowball: which should I choose?
Avalanche usually costs less interest. Snowball can keep you motivated with faster early wins. Pick the one you will stick with.
Should I save or pay off debt first?
Many people build a small starter fund first, then put extra money toward debt while still saving a little. The right balance depends on your situation.
Does paying a debt early cost extra?
Some lenders charge fees for early repayment. Check your agreement before paying extra.
Is it a good idea to take a new loan to clear old debts?
Only if the new loan is clearly cheaper overall, including all fees, and you do not run the old debts up again. Read the terms carefully, and consider advice from a qualified professional.