Which debt repayment method is the best?

  • The snowball and avalanche methods are two popular strategies for paying off debt.
  • The snowball method tackles your lowest balances first, offering smaller, more immediate gains.
  • The avalanche method prioritizes higher-interest debt, which lowers your long-term costs the most.
  • Read more stories from Personal Finance Insider.

Paying off multiple debts can be difficult. Having a strategy – and sticking to it – is key to getting there.

Two common approaches you might consider are the snowball method and the avalanche method. Each offers a framework for dealing effectively and efficiently with multiple debts. But the types of debt they prioritize differ. Here’s what you need to know about them and how to decide which is best for your financial situation.

Debt Snowball vs. Debt Avalanche: At a Glance

The snowball and avalanche debt repayment methods can help you reduce and eventually eliminate your debt. They are slightly different, however, and depending on your situation, one method may be faster or more affordable than the other.

  • Snowball method: With this strategy, you focus on paying off your smaller debt first. After that you take the next smaller one and so on until all your debts are paid off.
  • Avalanche method: This approach prioritizes your highest interest debt. Once that is paid off, you focus on the debt with the next highest rate.

What is the Debt Snowball Method?

The debt snowball method prioritizes your lowest debt. You will make minimum payments on all of your debts and allocate any additional funds to this smaller debt first. Once that is paid off, you then focus on the next smaller debt (using the funds you freed up by paying off the previous balance) and repeat the cycle until all debts are paid off. It is said to mimic a snowball, which grows in size and momentum as it rolls down a hill.

“The snowball method can be implemented by listing your various debts in order, from lowest total balance to highest balance, and targeting to pay off one debt in full at a time in that order” says Lauren Anastasio, Certified Financial Planner.MT and director of financial advice at Stash. “By making the minimum payment on all your other debts and devoting all your extra money to the smallest balance obligation first, you’ll pay off entire loans or cards faster, reducing the total number of bills you owe. pay every month.”

Although it is generally a more expensive approach than the avalanche approach – which tackles higher interest rate debt first – the snowball method offers a potential “behavioural” incentive , according to David W. Barnett, owner of Grand Arbor Advisors.

“Personal finance involves both math and behavior,” says Barnett. “The snowball method, while perhaps not as mathematically efficient, can have significant behavioral value in that there is a strong sense of reward for paying a debt in full and reduce the number of unpaid debts.”

Generally, the snowball method is best if you want to reduce the number of debt payments you make each month or if you need a little extra motivation to pay off your debts.

“The debt snowball method is a great option for people for whom debt is a behavioral issue,” says Bobbi Rebell, CFP® business and personal finance expert at Tally, which provides a financial app that helps you organize and pay off your credit cards. “If you need those quick wins to motivate you to progress, the debt snowball is the way to go. highest interest, but it can help bring about behavioral changes to keep you consistent and maintain momentum.”

Advantages and disadvantages of the debt snowball

Example of debt repayment with the snowball method

Say you have a personal loan with a balance of $4,500, a credit card balance of $8,000, and a car loan of $20,000. With the snowball method, you would make the minimum payments on your credit card and car loan while allocating the extra funds you have to your personal loan.

Once you’ve paid off the personal loan, you’ll begin to focus on your credit card, and then, finally, your car loan.

What is the debt avalanche method?

With the avalanche method, you pay off your debts based on the interest rate, focusing your extra funds on the debt with the highest interest rate first. When that debt is paid off, you move down the ladder to the debt with the highest rate, and so on.

“You make minimum payments on everything and invest as much as you can in debt with the highest interest rate,” Rebell says. “Once you have paid off the debt with the highest interest rate, transfer that payment to the next debt with the highest interest rate. Repeat until you have paid off all of your debt. As an avalanche, nothing can stop it once the momentum begins.”

The purpose of this strategy is to prioritize your most expensive balances and reduce your overall interest charges.

“From a purely mathematical standpoint, the avalanche method will always result in the greatest debt reduction per dollar, since the most expensive debt will be eliminated first,” Barnett said. “The intent of this method is to eliminate your highest interest rate debt first in order to save money.”

This approach is best if you’re looking to save as much money as possible, but it does have some downsides. On the one hand, it can be frustrating not to see results quickly. It also means you will have to keep juggling multiple debts for longer.

“This method works best for people who have a lot of debt or high interest rates on their debt, explains Thomas Racca, director of the


personal finance management

Navy Federal Credit Union team. “This method can be frustrating because it may take longer to reduce the different sources of debt you have, but it will pay off debt faster by prioritizing the highest amounts of debt first.”

Advantages and disadvantages of the avalanche of debt

Example of debt repayment with the avalanche method

Here’s what the avalanche method would look like in action if you had three debts: $3,000 on a credit card at 15% interest, $8,000 on a personal loan at 9%, and $25,000 on a car loan at a rate of 6%.

In this scenario, you would put all additional discretionary funds on the credit card while making only minimal payments on personal and auto loans. Once you’ve paid off the credit card, you’ll focus on paying off the personal loan (which has the second highest interest rate) and the car loan after that.

Choose a strategy and commit

If you are struggling to repay your debts, the snowball strategy and the avalanche strategy can help you. The key is to choose a debt and prioritize it, according to Anastasio.

“The last thing you want to do is spread your efforts by paying a little extra on all your bills,” says Anastasio. “If you have multiple credit card balances, loans, or other debts that you want to pay off, choose one debt, commit to paying the minimum on all of your others, and put every extra dollar you have into paying off that debt in full. C is the fastest way to eliminate the number of bills you have to pay.”

Tana T. Thorsen