Debt Snowball Vs. Avalanche – When And What To Choose And Why?

Are you planning to pay off your debts?

Congratulations buddy! You are one step ahead of leading a debt-free and financially stable life!

But you know what? When it comes to paying off debts, you might hear a lot of advice! And amidst this advice, you might not find out the right way to pay off your debts. The reason being, you need a debt relief strategy that fits into your situation well!

Let’s say, one of your friends has become debt-free by following a debt consolidation method. And he/she has suggested you debt consolidation. But let me tell you, buddy, it might not work well for you!

That’s why I always suggest opting for a debt relief strategy that fits into your financial situation! Else, you might end up being in more debt

By the way, have you heard about the debt snowball and debt avalanche method?

Well, as you know, both of these are effective ways to pay off your debts. But you might be in limbo, thinking which one to choose!

So, here you can get detailed information about the debt snowball and debt avalanche method. And most importantly, when to choose the correct debt payoff method and why?

Let’s start!

Debt snowball method

In this method, you concentrate on paying off your debt with the lowest outstanding balance amount first! But at the same time, don’t forget to make minimum payments on your other debts.

The idea is that starting small will give you a forward momentum; just like a growing snowball. After you pay off your debt with the smallest amount, move to the next smallest debt. This way, you can stay motivated during your debt repayment journey!

Once you pay off one of your debts, even if the amount is small, it gives you a quick win to remain inspired! Then you move to the next smallest debt and the next one and so on until all of your debts are paid off!

Once you pay off a debt, you can dedicate more funds to the next smallest debt. This way you move to the next one and so on until all of your debts are paid off! By the way, is it sounding complicated to you?

Let me explain to you the debt snowball method with a simple example! Let’s say, you have 3 debts like:

  • $1,500 credit card bill @5% interest with $50 minimum monthly payment
  • $2,500 private student loan @8% interest with $150 monthly minimum payment
  • $8,000 personal loan @15% interest with $250 monthly minimum payment

In the snowball method, you have to make minimum payments to each of the debts. And extra dollars to pay off the $1,500 balance amount first (as this is the lowest amount debt in the example).

So, out of $500, you can pay $100 for paying off the $1,500 balance amount first. Then you need to make the minimum payments of $150 and $250 for other debts.

Once you pay off the $1,500 credit card debt, start paying off your student loan amounting to $2,500. So now, you can make a monthly payment of $250 for your student loan and $250 for your personal loan.

And finally, once your $2,500 student loan is paid off, you can contribute the whole amount of $500 to pay off your personal loan!

The advantage of the debt snowball method is that it helps to build motivation! A study by Harvard Business Review has revealed that beginning with the smallest debt makes you more motivated. And this can help you to pay off your debts asap with success

Debt avalanche method

It is quite similar to the debt snowball method! In the debt avalanche method, start paying off your debts from highest interest rate to lowest rate, irrespective of the outstanding balance amount!

If you think mathematically, this makes the most sense! You will pay less in interest if you tackle your debts in this order . And saving money on interest means you will help you pay off your debts more quickly!

You will make minimum payments for all your debts. The difference with the debt avalanche is that you have to start making the payments for the debt with the highest interest rate . This approach is pragmatic as it prioritizes the most expensive debt first!

Then you work your way through to the lowest interest rate debt on your list. If your high-interest balances are also your bigger debts, it might take longer to pay off!

To help you stay on your payoff track, you can follow some steps to stay away from personal financial crises.

Let’s say, you have an outstanding credit card balance of $3000 at 24% interest rate and another one of $4000 at a 20% interest rate.

Well, the $3000 credit card balance should be your top priority as it carries the highest interest rate. Continue paying off your debts and rolling their minimums into the extra debt payments amount until all debts are paid off!

In an avalanche method, you may have to wait for a long time to feel the triumph of paying off debt, especially if your high-interest debt is the largest too! You can take the help of a debt payoff calculator to see your progress and be emotionally strong!

Now, you might think which one should you choose? Debt snowball or debt avalanche?

Well, as you can see, it all depends on your financial situation! Debt avalanche focuses on paying off your debt which has the highest interest rate. But it can be cumbersome for you if the highest interest debt is your largest amount of debt.

In that case, I would suggest you go for the debt snowball method! The snowball method focuses on paying off debts with the lowest outstanding balance amount first and so on.

So, you might get an emotional boost once you pay off one of your debts, irrespective of the amount.

Don’t worry! Opt for a debt payoff method which suits best in your financial situation! Hope, this comparison of snowball vs avalanche helps you to decide wisely!

Factors Debt Snowball Debt Avalanche
Motivation You feel motivated with your victory of paying off debt, irrespective of the amount. Can be a factor for your demotivation as the time required will be more
Financial aspect You could end up paying more in interest over time. You can save money if you can stay motivated throughout the entire process.
Time required Comparatively less It takes a long time as the debt with the highest interest rate might take a long time to pay

However, amidst some differences, both these debt payoff methods have a similar goal, i.e, to make you debt-free!

Also, if you want, you can also use both methods together. You will wonder how?

You can select 2 debts from your list – one with the lowest outstanding balance and the other one with the highest interest rate. Then, put an extra amount on both these accounts after making the minimum payments on others.

For example, quoting my previous example,

  • $1,500 credit card bill @5% interest with $50 minimum monthly payment
  • $2,500 private student loan @8% interest with $150 monthly minimum payment
  • $8,000 personal loan @15% interest with $250 monthly minimum payment

You can select the 1st one (credit card with lowest outstanding balance) and the 3rd one (personal loan with highest interest rate). Now suppose, you have an extra $200 every month to put toward paying back your debts.

So, put extra $100 each toward paying off these 2 debts. Doing so, you’ll be able to repay both the debts relatively fast. You’ll stay motivated since you’ll be paying off your credit card debt early and also, you’ll save interest payments on your personal too.

And don’t forget to let us know about your experience!

author Valentina Wilson profile pic

By Valentina Wilson on September 22, 2020

Valentina Wilson is a writer and blogger who specializes in personal finance and positive change and associated with BestDebtConsolidation. She has a master’s degree in financial journalism and seven years of experience in personal banking and believes that small behavioral changes are the key to achieving financial freedom.

Follow her on Twitter: @valentinailson