Debts other than a mortgage take money out of every month until they are paid, and a lender counts them when you ask for a mortgage. The plan treats each one as a loan, not as a fixed monthly cost that never ends.
How a debt is paid off
- Interest each month. The debt is charged its yearly rate divided by 12 on what is owed, then the monthly payment comes out of cash.[1] When the balance reaches nil the payments stop, and that money stays in the plan.
- The rate and payment stay as entered. A variable rate, a payment that changes with the balance, and new spending on a card are not modelled.[1]
- A payment below the interest never pays the debt off. The balance then grows each month, and the plan shows that.
Paying a debt down with a sum
Simulation's "Where should your next dollar go?" compares putting a sum into each account with paying it off each debt, and off the mortgage on a home you already own. The sum comes off what you owe in January of the plan's first year, up to the balance; anything left stays in cash. The payment stays the same, so the loan is paid off sooner. A mortgage given by its years left keeps those years, so its payment falls instead. A lump sum on a mortgage is taken as within what the lender allows each year without a penalty.[2]
A debt known only by its payment
A plan saved before debts were loans held only a monthly payment, and the start questions let you give a payment without a balance. Such a debt is taken as 60 months of that payment at no interest, until you enter what you owe and the rate. An older plan's living expenses lose the same payment, since they used to include it, so its spending is unchanged until the loan is paid.[3]
Credit cards
A credit card charges interest on the daily balance, posted each month; over a month that is within rounding of the yearly rate divided by 12.[1] Card rates are usually far above the rates on other debts and on what savings earn, so paying a card balance first usually saves the most.
What a lender counts
When you buy a home, the lender adds your other debt payments to the housing costs in the second ratio, total debt service, which may not pass 44% of gross income.[4] See mortgage qualification.
- A car loan, a student loan or another loan counts at its monthly payment while anything is owed. A debt paid off before the purchase counts for nothing.[5]
- A credit card or a line of credit counts at its payment, but no less than 3% of the balance, as an unsecured line.[6][5]
Interest on a government student loan earns a tax credit: see student-loan interest. A line of credit the plan opens itself when cash runs short is a separate thing: see borrowing when short.