Single debt formula
A simplified monthly APR model uses periodic rate i = APR / 12. In each month, interest = opening balance × i; the payment is then subtracted, capped at the amount owed. If the payment is no greater than the interest added, the balance will not decline under this model.
Worked example
For a fictional $5,000 balance at 18% APR with a $250 monthly payment, i = 1.5% per month. Applying interest before each payment pays the balance off in 24 months: 23 payments of $250 and a final payment of about $239.13. The modeled total interest is about $989.13 and total paid about $5,989.13. Figures are rounded for display.
Several debts: a different-order worked comparison
Consider two fictional debts: $1,000 at 8% APR with a $25 monthly minimum, and $5,000 at 24% APR with a $125 monthly minimum, plus $100 extra. In month one, interest is $6.67 on the small debt and $100 on the large debt. Snowball sends $125 to each debt; avalanche sends $25 to the small debt and $225 to the 24% debt. Both use the same $250 monthly budget, but target a different account. These fixed minimums are example model inputs, not lender requirements. This snapshot explains the first payment order; it is not a full payoff calculation.
Why ordering matters
Snowball directs extra money toward the smallest balance first; avalanche directs it toward the highest rate first. In this example, snowball targets the $1,000 balance at 8%, while avalanche targets the $5,000 balance at 24%. Minimum-payment rules, how freed payments roll forward, and the order of interest and payments affect full outcomes. A comparison describes entered assumptions; it does not establish which approach is best for an individual.
Sources for this section: Consumer Financial Protection Bureau: Your Money, Your Goals debt action plan resources
Limits
Real credit products may calculate interest daily, change APRs, apply fees, or use minimums that vary with the balance. The single-debt example assumes no new charges, a fixed APR, monthly periods, and fixed payments. Check statements and creditor terms for actual payoff amounts.