The debt avalanche method helps you pay down your debt by starting with the highest interest rate loans first.
This strategy has the potential to save you money while becoming completely debt-free! Keep reading to learn how it all works, plus the pros and cons.
What is the debt avalanche method?
With the debt avalanche method, you target your debts with the highest interest rates first. Be sure to make the minimum payment on all of your loans, but take any extra money you have and put it towards the loan with the highest interest rate.
Do this until that loan account is completely paid-off, and then switch your focus to the loan with the next highest interest rate. You’ll be able to work your way through all your loans until eventually, you owe nothing left!
How does the debt avalanche strategy work?
The debt avalanche strategy works much like any other to-do list you need to conquer–start by getting organized! Here’s a step-by-step guide to how you can pay-off your debt with this method, and hopefully save on interest along the way.
- Make a list. Take stock of all the debts you owe and order them from highest interest rate to the lowest. This can apply for all types of personal loans and credit card balances.
- Pay the minimum. Be sure to continue making the minimum payments on all of your credit card balances and loans. Even though you’ll be putting the majority of your extra cash into the loan with the highest interest rate, it’s important to be mindful of all your debts. You don’t want to owe more in fees or potentially damage your credit score.
- Pay more on the highest rate loan. The more additional money you put towards your highest interest rate loan, the less you’ll owe over time at that high rate cost.
- Keep up the momentum. Once you’ve paid off the loan with the highest rate, first of all, congrats! Then, cross it off your list and keep yourself motivated by redirecting the amount you were putting towards that loan to the one with the next highest interest rate. Soon, you won’t have any more loans to cross off your list!
Using the avalanche method to pay off debt
Many people turn to the debt avalanche method as an effective way of paying off their debts. This is because on most loans, a percentage of each monthly payment goes toward an interest charge, and the rest reduces your overall balance. With higher rates, you need to pay more money to cover the high-interest costs, which means your payment might not tackle your loan balance as much as you’d like. By lowering your overall interest rate, you’ll waste less money on interest and contribute more to your overall debt.
Pros and Cons of the Debt Avalanche Method
The debt avalanche method could save you a lot of time and money, especially if you have larger amounts of debt to pay off. And all it takes is switching around the order in which you pay them off! However, this strategy doesn’t work for everyone. Here are a few pros and cons to factor in when deciding for yourself.
- Pros: The biggest advantage is you’ll minimize your total cost of borrowing (as long as you stick to your plan). It also decreases the amount of time it will take you to get out of debt (again, assuming you stick to the plan), because less interest will accumulate. If you’re someone who’s disciplined enough to pay extra every month on larger debts, then this strategy can definitely work for you.
- Cons: Did you catch the key word we just mentioned? Discipline. This debt strategy requires a lot of discipline to see the entire plan through. And it gets tough to continually put all your extra money towards paying off your loans instead of daily expenses, emergencies, or indulgent purchases. It won’t be an effective means to becoming debt-free if you miss a monthly payment or simply lose motivation.
What to do if you need more help
Becoming completely debt-free is a long process! And it’s more than OK to ask for a little extra help along the way. Here’s what to do if the debt avalanche method doesn’t seem like enough, or not the right option for you.
- Consider the Debt Snowball Method. With this option, you’ll pay off your debts in order from smallest to largest. The theory is that by having smaller wins early on, you’ll want to stick with the plan to completely eliminate even your largest of debts. The downside is, this strategy could end up being more expensive.
- Talk to a Credit Counselor. These are people who work for nonprofit organizations and can provide educational resources and assistance with your debt. Oftentimes, they’ll help you create a debt management plan to lower your monthly loan payments and interest rates, getting you out of debt quicker.
- Look into Debt Settlement. You’ll connect with a debt relief company that will help you negotiate or consolidate the balance owed on your loan for a fee. Then, you’ll work out a new payment plan to pay off one large payment instead of the debt amount.
