At a Glance
The debt avalanche method can help you pay off debt and save money on interest. This article will go into detail about the debt avalanche, including:
- What is the debt avalanche method?
- How does the avalanche method work?
- Pros and cons of the debt avalanche method
- Example of paying off debt with the debt avalanche method
- Is the debt avalanche method better than the debt snowball method?
- Alternatives to the debt avalanche method
- Bottom line: is the debt avalanche method good for you?
We get it: the prospect of paying off mountains of unpaid bills can be paralyzing, especially if your stack of statements is more Mt. Everest than bunny slope. Fortunately, there are different strategies, such as the debt avalanche method, that can help you get started.
In this article, we’ll go into detail with how you can use the avalanche method to pay off debt so you can become debt-free once and for all. We’ll also discuss other options, like the debt snowball method, so you can find the best method to fit your financial needs.
What is the debt avalanche method?
The debt avalanche method is a repayment strategy where you prioritize paying off your balances with the highest interest rates. You’ll continue making minimum payments on all your loans, but you’ll put extra money toward the one with the highest interest rate first. Once that’s paid off, you’ll focus on paying off the loan with the next highest interest rate, and so on, until you’re completely debt-free.
How does the avalanche method work?
The avalanche method of debt reduction works by focusing on paying off high-interest debt so you can save money on interest in the long run. Here are the 4 steps of the method:
- Take stock: Do a complete inventory of all of your debts and list them in order of highest to lowest interest rate.
- Make minimum payments: Make the minimum payments on all your balances or loans. While you’re focusing on the one with the highest interest, you’ll still want to make sure you’re staying up-to-date on the rest of your payments. Otherwise, you could ding your credit score and incur late fees.
- Put extra towards the highest interest: Any extra money you have should go toward the loan with the highest interest rate. Paying off high-interest balances can help you save overall, which in turn can help you get out of debt faster.
- Keep it going: Once you’ve paid off your highest-interest balance, take the money you were using on that loan to help pay off the next highest interest rate. When you’re completely out of debt, you’ll have the freedom to pursue your other financial goals—like buying a house, saving for retirement, or taking a big trip.
Pros and cons of the debt avalanche method
Here are some pros and cons of the debt avalanche method:
Advantages of the debt avalanche method
The debt avalanche method can help you save money overall since you’re focusing on eliminating balances with high interest. Most loans require you to pay a portion each month towards interest and the rest towards the balance. By decreasing your high interest payments, you’ll waste less on the interest amount and have more cash available to pay down the balance.
Disadvantages of the debt avalanche method
The debt avalanche method may not be the best repayment choice if you need help with finding motivation to pay off your debt. Since you’re tackling the loan with the highest interest, it might take a while to pay it off. Unlike the quick wins you’ll get from the debt snowball method (more on that below), the debt avalanche method can be more of a slow burn.
Example of paying off debt with the debt avalanche method
Here’s an example of how the debt avalanche method works. Let’s say you have the following balances:
- A $1,500 credit card balance with a 15% interest rate
- A $2,000 credit card balance with a 14% interest rate
- A $12,000 car loan with a 5% interest rate
You’ll start with the credit card with the $1,500 balance since it has the highest interest rate. Once that’s paid off, you’ll put extra money toward the $2,000 credit card balance because it has the next highest interest rate. The car loan would be last since it has the lowest rate.
Is the debt avalanche method better than the debt snowball method?
The debt snowball method is a repayment method where you make minimum payments on all of your balances but put extra money toward the smallest balance. Once that’s paid off, you’ll move to the next smallest balance. The debt snowball method is best for individuals who need an extra dose of motivation to get started paying off their debt.
Alternatives to the debt avalanche method
Besides the debt snowball method, here are some alternatives to debt avalanche:
- Personal loans: A personal loan can help you pay off your credit card debt. A higher credit score usually gets you a lower interest rate, so be sure to do your research ahead of time to see which rates you’ll qualify for.
- Balance transfers: With a balance transfer, you move your existing credit card balances to a new card that ideally has a lower interest rate. Balance transfers can simplify how you pay your bills each month, since you’ll only need to pay one balance per month, and can save you on interest.
- Debt management plan: A debt management plan (DMP) is when you pair up with a nonprofit credit agency to help reduce monthly payments and interest rates, as well as strengthen your financial habits. You’ll continue to pay down your principal amount, but you’ll have some professional help.
Bottom line: Is the debt avalanche method for you?
The debt avalanche method might be a good repayment option for you if you want to save money overall on your payments, don’t need more motivation to pay off your debt, and are disciplined enough to pay off a large loan, possibly over a long period of time.