Paying It Down: Payoff Methods and Negotiation

What You Will Learn

• Explain the smallest-balance-first and highest-rate-first payoff methods
• Build a month-by-month payoff schedule
• Calculate one month of interest to compare costs
• Negotiate payment plans and settlements in writing

Lesson Notes

Two Payoff Methods

Both methods start the same way: pay the minimum on every debt, every month, and send all extra money to one target debt. When the target is paid off, its payment rolls over to the next target, so the payment you are making grows.

• Smallest-balance-first (sometimes called a debt snowball): target the smallest balance first. Quick wins build motivation.
• Highest-rate-first (sometimes called a debt avalanche): target the highest interest rate first. This usually costs less in total interest.

Both work if you keep going. Choose the one you will stick with. Court obligations and child support stay on their own fixed plans and are paid every month; they are not part of the rollover.

Worked Example: Keisha

Keisha has three debts and $150 per month for debt payments. (Keisha is a composite example.) To keep the math simple, this practice example leaves out interest; with real interest, payoff would take somewhat longer.

• Debt 1: $200, minimum $20. Debt 2: $600, minimum $30. Debt 3: $1,000, minimum $50. Minimums total $100, so $50 is extra.
• Months 1–2: Debt 1 gets $20 + $50 = $70 each month. After month 2 it owes $60.
• Month 3: Debt 1 gets its last $60, and the remaining $40 goes to Debt 2 ($30 minimum + $10 extra). Debt 1 is paid off.
• Months 4–8: Debt 2 gets $100 per month (the $70 rolled over plus its $30). Debt 2 is paid off in month 8.
• Months 9–12: Debt 3 gets the full $150. Debt 3 is paid off in month 12. Total paid: $1,800 in 12 months.

Why Interest Rate Matters

To estimate one month of interest, multiply the balance by the annual rate and divide by 12. Example with sample rates: a $1,000 balance at 24% costs about 1,000 × 0.24 ÷ 12 = $20 in one month. A $500 balance at 6% costs about 500 × 0.06 ÷ 12 = $2.50. Sending extra money to the higher-rate debt saves more interest each month. (Rates in this course are samples for practice, not real offers.)

Negotiating and Payment Plans

Many creditors would rather receive steady payments than nothing. You can ask for a lower payment, a hardship plan, waived fees, or a settlement (paying less than the full balance as payment in full).

• Decide what your budget can truly afford before you call.
• Get every agreement in writing before you pay.
• Pay in ways you can track; do not give open access to your bank account.
• Forgiven debt can sometimes have tax effects; ask a VITA site or tax professional.

An accredited nonprofit credit counseling agency can review your situation and may offer a repayment plan. Bankruptcy is a legal process with lasting effects, and not all debts can be discharged; talk with a qualified attorney or legal aid before deciding anything.

Key Terms

In-Class Activities

Build Denise's Schedule

Denise has $310 per month for consumer debt (her $40 court plan is paid separately every month). (Denise is a composite example.) Debts: A) medical collection $300, min $25; B) phone collection $450, min $30; C) store card $900, min $35, sample rate 24%; D) car loan $2,400, min $120, sample rate 6%.

Leaving out interest, build a smallest-balance-first schedule month by month. In which month is each debt paid off? How many months in all?

Then list the order she would use for highest-rate-first.

Negotiation Script

A collector says Denise owes $800 on an old account and offers to settle for $480 in six equal payments. Write the questions she should ask, what she must get in writing, and the amount of each payment. What percent of the balance is the settlement?

Assignment: My Payoff Method

Using your Module 2 inventory (personal or composite):

• List your consumer debts in smallest-balance-first order and in highest-rate-first order.
• Choose a method and explain why it fits you.
• Decide on a monthly debt payment amount your budget can support (or use the composite amount).
• Build a schedule for at least the first six months, showing the rollover when the first debt is paid.
• Keep court and child support payments listed separately as fixed monthly payments.

Graded with the Module Assignment Rubric.

Reflection Journal

Romans 13:8 says to owe no man anything but love. Picture the day your last debt is paid. What will you do with the money that used to go to payments? How could love for others shape that freedom?

Prayer focus: Ask God for steady perseverance, wisdom in every conversation with creditors, and joy in each small victory.

One Debt at a Time

Mountains are climbed one step at a time. Debt is paid one payment at a time. This week you learned two ways to organize those payments: smallest-balance-first, which gives quick wins, and highest-rate-first, which usually saves the most interest.

Both methods share the same secret: the rollover. When one debt is paid, its payment does not disappear into daily spending. It joins the payment on the next debt. Your payment grows like a snowball rolling downhill. Keisha's $70 payment became $100, then $150. (Keisha is a composite example.)

You also learned to negotiate. Many creditors would rather have steady payments than nothing. Decide what you can afford, ask clearly, and get every agreement in writing before you pay. Proverbs 6:3 says, go, humble thyself, and make sure thy friend. Humility and boldness can go together.

Some months you will want to quit. Galatians 6:9 promises that in due season we shall reap if we faint not. Mark each paid-off debt on your chart. Celebrate it. Then keep going.

Think About It

1. Which payoff method fits you, and why? ______________________
2. What would you say to a creditor to ask for a payment plan? ______________________
3. How will you celebrate your first paid-off debt? ______________________

Daily Devotions for Week 6

Owe No Man

Owe no man any thing, but to love one another: for he that loveth another hath fulfilled the law.— Romans 13:8 (KJV)

The goal is to owe nothing but love. Every payment moves you closer.

Reflect: What will love look like when you are debt-free?

Pray: Lord, lead me toward owing nothing but love.

Do: Make or plan one payment toward your target debt.

Humble Thyself

Do this now, my son, and deliver thyself, when thou art come into the hand of thy friend; go, humble thyself, and make sure thy friend.— Proverbs 6:3 (KJV)

Approaching a creditor humbly and promptly is biblical wisdom.

Reflect: Which creditor do you need to contact?

Pray: Lord, give me humility and courage.

Do: Write your negotiation script.

Not Weary

And let us not be weary in well doing: for in due season we shall reap, if we faint not.— Galatians 6:9 (KJV)

Paying off debt takes months. The harvest comes to those who keep going.

Reflect: Where are you tempted to give up?

Pray: Lord, keep me from fainting.

Do: Color in one square on your payoff chart.

The Diligent

The thoughts of the diligent tend only to plenteousness; but of every one that is hasty only to want.— Proverbs 21:5 (KJV)

Steady plans lead to plenty; hasty choices lead to want.

Reflect: What hasty choice do you want to avoid?

Pray: Lord, make me diligent.

Do: Check your schedule math one more time.

Patient Race

Let us run with patience the race that is set before us,— Hebrews 12:1 (KJV)

Debt freedom is a long race, not a sprint.

Reflect: What will help you keep a steady pace?

Pray: Lord, give me patience to run.

Do: Tell an accountability partner your payoff goal.