What Is The Debt Avalanche Method?
6-Minute ReadJune 10, 2022
If you’re struggling to repay any combination of consumer debts – like car payments, home loans or credit cards – it may be time to consider the debt avalanche method.
This type of accelerated debt repayment plan is targeted toward people who have enough money saved for expenses and emergencies, but who might need help directing the funds to pay off their outstanding debts.
While there are several effective methods for paying down debt, this article will focus on how the debt avalanche method can help borrowers get out of the red with minimal interest charges.
The Debt Avalanche Method, Defined
To understand this debt paydown strategy, first visualize its namesake. Similar to an avalanche of snow or rocks falling rapidly down a hill, this repayment plan encourages borrowers to pay off their debt with the highest interest rate first before tackling the lower-interest payments.
Debtors commit to paying the minimum monthly payments on all outstanding debts, but allocate extra funds to the balance with the highest interest rate. That way, the high-interest loan will be paid off first, saving you in the total interest you would have paid if you only paid the minimum amount. Borrowers should continue this payback system until they’re debt-free.
How Does The Debt Avalanche Method Work?
The key to this repayment strategy is setting aside a feasible amount of your monthly income to pay off your debts. These designated funds should be separate from living expenses or your emergency fund. Let’s take a look at an example of the debt avalanche method in action.
Jennifer has allocated $700 per month to help pay off her credit card debts. Her loans are as follows:
- $5,000 on a credit card with 15% APR
- $6,000 on a credit card with a 16% APR
- $4,000 on a credit card with a 18% APR
Jennifer would start her payment cycle by paying the minimum (typically 1 – 4% of the outstanding balance) on the credit cards with the lower interest rates. Then, she’d put the remainder of her $700 budget toward the 18% APR credit card. Once that card is paid off, she’d shift to working the same system on the credit card with the second-highest interest rate, and then the next.
Who Benefits The Most From The Avalanche Method?
It’s important to note that the debt avalanche method does not work for every debt situation. For the repayment plan to work, borrowers need to have extra money to designate toward paying down debts, without sacrificing their savings or living expenses.
This payoff strategy also requires several months, or even years, to complete. That means borrowers must be willing to dedicate a significant amount of time and money toward the final goal of becoming debt-free. If you fall into both of these categories, you’re the perfect candidate to adopt the debt avalanche method.
The Pros And Cons Of The Avalanche Method For Debt
Now that we understand how this payback strategy works, let’s review the benefits and drawbacks of using it.
The Pros Of The Debt Avalanche Method
There are two main advantages to the debt avalanche method. First, borrowers can potentially save thousands of dollars in interest by using this system to pay off their high-interest debts quickly.
Think about it: If you pay down your delinquent account with the highest interest first, you’ll avoid accruing compound interest, plus free up more money to put toward your other debts. By the time all of these debts have been repaid, you’ll be able to calculate how much you kept in interest savings by sticking to this repayment system.
The other benefit of this method? If borrowers commit to making consistent payments through the avalanche system, it should take them less time to get out of debt. With less accumulating interest, borrowers will ideally be able to pay off their debts significantly faster.
The Cons Of The Debt Avalanche Method
As mentioned above, the debt avalanche method requires borrowers to commit to making significant payments until all outstanding balances are repaid. Some people may find it tempting to revert back to paying the minimum monthly payments to spend that money elsewhere. It can also be difficult to stick to the repayment plan if unexpected expenses arise, such as medical bills or home improvement repairs.
However, debtors can avoid these drawbacks by planning ahead for the debt avalanche method. If you’re able to save up a few months’ worth of payments before starting the accelerated program, you’ll be prepared to see it through.
The Debt Avalanche Method Vs. The Debt Snowball Method
You may have heard of another popular approach to tackling debt: the debt snowball method. This tactic suggests that debtors pay off their smallest debts first before tackling the larger ones.
Let’s review how Jennifer would pay off her credit card debt using the debt snowball method. After making the minimum payments on the two cards with the highest outstanding balances, she would put her remaining “debt budget” toward the $4,000 on the credit card with a 18% APR. After she has paid off her balance on that credit card, she would then move onto paying down the next smallest balance until all of her debts are repaid.
So, which payoff strategy is more effective? There’s not really a big difference between the outcomes of the two approaches. Both methods require serious time and financial commitments, but should ultimately lead to the same debt-free conclusion.
If you’re feeling overwhelmed by the amount of debt you’ve accrued, it’s important to find the right debt solution and act fast. The debt avalanche method is one of many efficient ways to pay down your debt as quickly as possible while avoiding interest charges whenever possible.
If you don’t think the debt avalanche or snowball methods are right for you, consider a debt consolidation personal loan. You can apply today and learn how Rocket Loans can help you achieve more by consolidating your unsecured loans into a single monthly payment!
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