The Difference Between Debt Snowball and Debt Avalanche
Author: Tiffany Wagner
It’s difficult to wipe off debt, especially if you only make the minimum repayment required for your loan every month. Hence, accelerated payments are frequently necessary to be set completely free of debt. The debt snowball and the debt avalanche are two methods to pay off your loans systematically.
You might have heard about them and how they are effective when it comes to paying off the money you borrowed. So, to know the difference between the two, read the definition and explanation of both repayment methods below.
What Is Debt Snowball?
A debt snowball is a debt reduction technique that intends to pay off your debt from smallest to largest as you gain momentum throughout the process.
In this method, you will need to focus on your smallest debt and allocate extra money to pay this debt first while paying your other loans on their minimum required monthly repayment. And when you pay it in full, you then move forward to the next smallest debt you have and do the same until you reach the biggest and the last debt you acquired.
This strategy follows the same process as making a snowball. You start with a small snowball and roll it over until it becomes bigger. That’s how the debt snowball method got its name.
Using this strategy to pay off your debt will provide great benefits, like motivating you to pay off your debt. Additionally, the debt snowball method is pretty straightforward to implement since you’re not required to compare the annual percentage rates (APRs) of various debts. To rate any debt, you merely need to know the total amount outstanding.
How Debt Snowball Works
Now that you know what debt snowball means, let us talk about how it works. The first that you need to do when using the snowball method is to list all your loans from smallest to biggest. The list will be your guide in knowing which debt you should prioritize first without neglecting the minimum monthly repayment for your other loans.
Make sure you pay as much as possible on the smallest debt on the list so that it’s settled as soon as possible, allowing you to move on to the next one immediately. Repeat what you did on the first debt to the next one, and so on.
Remember that the debt snowball strategy can be utilized to pay off credit cards, personal and other loans, and other lines of credit in addition to credit cards.
What is Debt Avalanche?
A debt avalanche is a form of expedited debt repayment arrangement. Debtors set aside enough funds to cover the minimum amount due on each obligation, then apply any remaining cash toward the loan with the highest interest rate.
When the debt with the highest interest rate is fully repaid using the debt avalanche strategy, the extra repayment funds are applied to the loan with the next-highest interest rate. This process keeps going until all of the debts are settled.
Choosing the debt avalanche approach can help you reduce the loan interest while working on achieving debt freedom as long as you follow the plan.
Just a reminder, for the debt avalanche approach to be successful, you must have enough cash available to cover basic expenses and emergencies.
How Debt Avalanche Works?
The debt avalanche technique instructs you to prioritize paying off your largest debt before any other debt. For example, if your highest-interest debt is a credit card amount with an annual percentage rate (APR) of 18.99%, you should focus on paying off that balance first while still making at least the required minimum payments each month on your other debts.
Any additional funds you find in your budget are applied to your highest-interest debt, which is the credit card with an 18.99% annual percentage rate in this scenario.
You continue to the next highest APR debt after paying off the credit card balance with the 18.99% APR. Let’s assume it’s a personal loan with an APR of 10.99%.
At this point, you transfer the funds you were using to pay off the credit card balance with the 18.99% APR to the personal loan with the 10.99% APR, increasing the loan’s monthly minimum payment. Once more, you continue paying all your remaining debts at the minimum amount due each month.
By following this plan, you could pay off all your outstanding loans while lowering the overall amount of interest you have to pay.
Therefore, the difference between the debt snowball and debt avalanche is that the debt snowball method starts paying off debt from the smallest to the largest interest rate debts. Meanwhile, the debt avalanche starts with the largest-interest rate loans and then down to the smallest.
Which is the Better Method?
If you are wondering which method is the ideal one to use to pay off your debt, it’s advised that you choose the one that fits your capability. Your psychological makeup will determine if you should pay off major or minor debt first, such as whether or not settling off smaller loans will motivate you to stick with a repayment plan.
On the other hand, paying down substantial debt over time is more cost-effective. You will end up paying a higher interest the bigger your remaining balance is. Therefore, paying off the large loan will save you money on interest and give you extra cash for other expenses.
You must pay off your loan to achieve good financial health if you want to continue enjoying any financial products available. Lenders such as banks or online lenders like CreditNinja will look into your credit history and offer better terms to those with lesser debt.
To Sum it Up
You can choose various methods to help you settle all your loans one at a time. Whether you prefer to follow the debt snowball method or opt to go for the debt avalanche method is up to you. As long as it fits and improves your current financial status, don’t be afraid to stick to the repayment method that you choose.
Author Bio: Tiffany Wagner is a freelance writer and seasoned contributor for various sites that talk about real estate and estate. Apart from writing, she’s also a library and coffee shop habitue. Tiffany likes to indulge in a hot cup of cappuccino while reading her favorite novel.
