How to Pay Off Debt: Debt Snowball vs. Debt Avalanche

Debt: just the word itself has the ability to cause stress. Debt can create an overwhelming feeling of dread that just won’t seem to go away. This blog will discuss two popular ways to tackle debt – the debt snowball and the debt avalanche – both of which can help reduce stress and keep you motivated to pay off debt.

Debt Avalanche

The first method is the debt avalanche. With this method you assess all of your debt, but focus on the one with the highest interest rate first. With the debt avalanche, you make the minimum payment on all outstanding debts, except for the one with the highest interest rate. You make more than the minimum payment on the highest-interest rate loan – as much as your budget will allow. Then, once that debt is fully paid-off you work your way down the list and repeat this process on the debt with the next-highest interest rate. The goal is to pay off the debt that carries the most interest by putting extra money towards it.

From a financial standpoint, the debt avalanche approach is the better option (compared to the debt snowball) if your goal is to minimize your total out-of-pocket interest expenses. This is because you are paying off the highest interest rate debt first.

However, with the debt avalanche it can be hard to stay motivated, as the biggest debt payment could be the one carrying the highest interest rate. That being said, this method works best for highly disciplined individuals, because seeing tangible progress will take longer.

Debt Avalanche Example

  • $10,000 credit card, 16% interest rate
  • $5,000 car loan, 3% interest rate
  • $20,000 student loan, 5% interest rate

If you were to use the debt avalanche method your extra funds would be put towards the credit card loan first because it carries the highest interest rate. After you’ve paid off the credit card, then you’d move to the student loan, and finally the car loan. It is important to remember that while you are focusing on the debt with the highest interest rate, you continue to make the minimum payments on the others. After you’ve paid off the credit card loan you can use the initial extra funds, along with the minimum amount you were paying towards the credit card to make even more progress on the student loan.

Debt Snowball

The next method is called the debt snowball. With the debt snowball, you focus on the outstanding balance instead of the interest rate.

Here you would pay extra money to the debt that has the lowest outstanding balance, regardless of interest rate, while continuing to pay the minimum payments on the others. The idea here is to provide motivation to pay off the remaining debt by seeing instant progress. The debt snowball is ideal for those who value seeing results over saving on interest costs.

Debt Snowball Example

  • $10,000 credit card, 16% interest rate
  • $5,000 car loan, 3% interest rate
  • $20,000 student loan, 5% interest rate

Going off of the same example, but approaching it using the debt snowball method will give you a different result than the avalanche approach. With the debt snowball you would pay off the car loan first, because we are only looking at the smallest balance, rather than the interest rates. Next you’d pay off your credit card debt, and finally your student loans. You can do the same as the debt avalanche, once you’ve paid off the car loan you can use your initial extra funds in conjunction with the amount you were paying towards the car loan to make faster progress on the credit card debt.

The Bottom Line

Both the debt snowball and the debt avalanche can be effective repayment plans. There is no right or wrong answer – the choice between debt avalanche vs. debt snowball will depend on your objectives and what type of person you are. If you are more concerned about spending the least amount of money possible and have the discipline to stay motivated, then the debt avalanche may suit you. However, if you fear you will lose momentum or motivation, the debt snowball will most likely be for you because it offers instant gratification when you see debt balances whittle away.

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