Money Research Collective’s editorial team solely created this content. Opinions are their own, but compensation and in-depth research determine where and how companies may appear. Many featured companies advertise with us. How we make money.
Debt Snowball vs. Avalanche Method
By Nicole Symon MONEY RESEARCH COLLECTIVE
Dealing with debt is challenging. You may sometimes feel like there’s no way out. To make your debt more manageable, you can try a strategy. Two of the most popular methods are the debt snowball method and the debt avalanche method.
Use this guide to learn more about these two methods for tackling debt and decide which is better for you.
What is the snowball method?
In the debt snowball method, you first focus on paying off debts with the lowest balances. Each time you successfully pay off your smallest loan, you move on to the next-smallest amount until you reach your largest balance and pay off all your debt. You start small and work your way up to bigger loan amounts, just like a snowball gets bigger as it rolls down a hill.
While doing this, you still make minimum payments on all your debts but allocate more funds to the smallest balance.
- You'll enjoy an early win when you pay off your smallest loan
- You'll get extra motivation as you see each loan eliminated from your list of outstanding balances
- Applying the snowball method is very straightforward
- It will take longer to pay off your debts than the debt avalanche method
- You'll spend more in interest paying off your debt over time
Examples of debt snowball
Say you have $25,000 in student loan debt (6% APR), a credit card balance of $8,000 (18.5% APR), a personal loan of $7,000 (17% APR) and another credit card balance of $2,500 (20% APR). Using the snowball method for debt repayment, you would start by making minimum monthly payments on all your loan bills except the $2,500 credit card balance. After making those minimum payments, you would pay as much as possible toward the $2,500 credit card balance since it’s your smallest loan. Once you completely pay off that card, you focus on personal loans, other credit cards and, finally, your student loan debt.
So, how does debt snowball work if you have multiple loans for the same amount? In this example, say your list of debts looks like this:
- $10,000 auto loan (4% APR)
- $10,000 student loan (7% APR)
- $3,000 credit card debt (21% APR)
- $3,000 personal loan (18% APR)
Here, you have two pairs of loans for identical amounts. If you wanted to use the debt snowball method, you would choose one of the two $3,000 loans and treat it as your smallest balance. In this scenario, you could apply the general principle of the avalanche method and focus on the credit card debt before the personal loan because it has a higher interest rate. After paying off both $3,000 loans, you’d choose one of the $10,000 loans to focus on next.
The fundamental principle of the debt snowball method is that you need strong motivation to pay off all your debt. Eliminating your smallest loan balance early helps immensely with that. You’ll start seeing the light at the end of the tunnel of debt and have the motivation to keep going.
What is the avalanche method?
In the debt avalanche method, you first focus on paying down your debt with the highest interest rate. Different loans come with different annual percentage rates (APRs) that dictate how much you pay in interest. To use the avalanche method, list out all of your outstanding debts in order of highest to lowest APR. Once you have this list, using the avalanche method, your priority should be to eliminate the loan with the highest APR first.
You make minimum payments on all your outstanding loans other than the one with the highest APR. You then take as much money as possible and put it toward paying off your highest APR loan. After you completely pay off that loan, you focus on the loan with the next-highest APR and so on until you’re out of debt.
The principle behind the avalanche method is to get rid of loans with the highest interest rates since they will cost you more in the long run. Some financial experts recommend the avalanche method because it helps you save on interest fees while eliminating debt.
- Pay off your debt faster compared to the debt snowball method
- Save money by reducing the total interest you pay on your loans
- Using the avalanche method will likely take longer to eliminate your first loan balance
- If you struggle to stay motivated, sticking to the avalanche method may be challenging
- Loans with variable interest rates can complicate your list of outstanding balances from highest to lowest APR
Examples of debt avalanche
Say you have four outstanding debts — two credit card balances, a student loan and a car loan that break down as follows:
- $3,400 credit card debt (25.8% APR)
- $2,000 credit card debt (17.16% APR)
- $8,000 car loan (8.2% APR)
- $12,000 student loan (6.5% APR)
Using the debt avalanche method, you would make the minimum payments on your student loan, car loan and credit card balance with a 17.16% APR. You would then take whatever amount you have left that month for paying down your debts and put it toward the $3,400 credit card balance with a 25.8% APR since that’s the highest interest rate of all your debt. You spend as much money as possible each month on the debt with the highest interest rate.
Once you pay that debt altogether, you would then move on to paying off the other credit card debt (second-highest APR) while making minimum payments on your car loan and student loan. Next, you’d pay off the car loan (third-highest APR) while making minimum payments on your student loan. Finally, you would focus solely on your student loan (lowest APR).
But what if you have a mortgage? In this example, say you have three types of debt:
- $220,000 mortgage (6.53% APR)
- $3,000 credit card debt (18.89% APR)
- $14,000 car loan (4.25% APR)
You might think that the avalanche method would tell you to first focus on the credit card debt, next your mortgage and then your car loan since these are your outstanding debts in order of highest to lowest interest rates. However, mortgage debt isn’t included in the avalanche method.
The avalanche method applies to most other types of consumer debt, including auto loans, credit card balances, student loans, personal loans and medical bills, but not mortgage repayments. So in this example, you would focus on paying down your credit card debt before your car loan and pay your mortgage repayments as usual.
How debt snowball and avalanche compare
Though these two strategies have the same goal of helping you get out of debt, there are some critical differences between them.
Period that debt is paid
The snowball method will generally get you your first “win” quicker than the avalanche method since you tackle your smallest loan first. On the other hand, even though it takes longer to get your first win while using the avalanche method, it helps you pay off all your debts faster than the snowball method. Choose the avalanche method if you’re trying to pay off your debt as soon as possible.
The difference between how long it will take to eliminate your debt using the debt snowball vs. avalanche method depends on the specific details of your financial situation, like your loan amounts and interest rates. Sometimes, the timing difference between the two methods is minimal. You can use a debt snowball calculator and a debt avalanche calculator to compare how long it will take to eliminate your debt with each method.
Cost savings
Using the avalanche method will typically lead to cost savings compared to the snowball method. You’ll typically pay less interest using the avalanche method because you first pay down your debt with the highest interest rate. In the snowball method, if your highest interest rate loan is also one of your higher loan amounts, you’ll likely spend more on interest payments since it will take longer to eliminate that high-interest-rate debt.
Level of motivation required
When you’re creating a plan for paying off debt, it’s essential to make sure that you can stay motivated to stick with it. If you’re worried about staying motivated, using the snowball method might be the better option over the avalanche method. The snowball method helps you get a quick win when you pay off your first (smallest) balance. Each success as you pay off your loans from smallest to largest will motivate you to continue on your debt repayment journey.
By contrast, the avalanche method for debt repayment requires a higher level of motivation since it can take longer to pay off your first loan balance. You won’t get to start crossing loans off your list as quickly, but you will save money on interest payments. It’s all about what’s more important to you. If those cost savings are enough to keep you motivated and disciplined over the long haul, you can make the debt avalanche method work.
Alternative ways to pay down your debt
The debt snowball and avalanche methods aren’t the only options for paying down debt. One alternative is to pursue a debt consolidation loan. When you consolidate your debt, you only have one monthly payment at a lower average interest rate for all your outstanding debt. This helps organize your budget and pay down your debt faster.
Aside from a debt consolidation loan, a balance transfer credit card is another option. These cards have an introductory 0% APR for a set period (generally six to 18 months), so you can avoid paying interest during that time. You simply move your high-interest debt to the balance transfer credit card and pay your monthly payment, gradually reducing the principal of your loan amount.
Remember that these cards often charge a balance transfer fee between 3% and 5% of your transfer amount. The amount you save on interest may outweigh this cost, but if it won’t in your case, a balance transfer card is not the right option for you. You also generally need strong credit to use a balance transfer card. If you want to improve your credit score and pursue this option, you can try to remove charge-offs, remove collections and dispute credit report errors to boost your score.
Another option you should consider is learning how to negotiate with debt collectors so you can pay down your debt faster. Understanding how debt collectors work can help increase your confidence while repaying your debt and help you avoid common issues.
Which strategy works with your debt management goals?
People often ask which is better: debt snowball or debt avalanche. The truth is that either method can work for you depending on your debt management goals. The debt avalanche method may be the way to go if you want to save money and be debt-free as soon as possible. However, if you struggle to stay motivated and stick to your budget, you might be better off with the debt snowball method.
Ask yourself — what are your main goals for managing your debt? The answer to this question will help you pick the right debt management strategy for your situation and preferences