Debt Snowball Vs Debt Avalanche – Key Differences
Choosing a debt repayment method that works for you is an important decision. Debt can affect your money mindset, motivation and self-esteem. There are two main approaches to debt repayment: debt snowball and debt avalanche.
What is the debt snowball method?
The debt snowball method is a debt repayment approach that focuses on paying off the smallest balance first. This debt repayment method involves doing the following:
- Making the minimum payment on all debts.
- Making extra payments on the debt with the lowest balance.
- After the smallest debt is paid off, rolling that entire payment you were making on that debt to the loan or credit card with the next lowest balance.
- Repeating until all debt is paid off.
The big benefit of the debt snowball method is that it should help you stay motivated. As you repay each debt in full, you’ll be excited to continue your repayment plan. But the downside is, you could end up paying more in interest. If the smallest balance has a lower rate, you’ll have your high-interest debts for longer before paying them down.
What is the debt avalanche method?
The debt avalanche method prioritizes your debts with the highest interest rate first. It involves:
- Making minimum payments on all debts.
- Making extra payments on the debt with the highest interest rate.
- Rolling that entire payment over to the debt with the next highest rate, once each loan or credit card debt has been paid in full.
- Repeating until you’ve paid off all debt.
The debt avalanche method allows you to focus on eliminating high-interest debt — the most expensive debt — ASAP. The downside is that if your high-interest debt has a very high balance, it could take a long time to pay it off. The extended payoff time may make it more difficult to stay motivated.
Example of each method
Let’s say you have $200 extra to put toward debt payoff each month and you have the following debts:
- A $10,000 loan balance with a 15% interest rate and $225 minimum monthly payments.
- A $5,000 loan balance with an 8% interest rate and $85 minimum monthly payments.
- A $1,000 loan balance with a 4% interest rate and $20 minimum monthly payments.
If you used the snowball method, you would pay off the $1,000 loan first, then the $5,000, then the $10,000. You’d be out of debt in 38 months and pay a total of $19,621.
If you used the avalanche method, you would pay off the $10,000 loan, then the $5,000 loan, then the $1,000 loan. You’d pay back your debt in 36 months and pay a total of $18,854.
So, which is right for you?
Depends obviously! Debt payoff approach will vary considering your goals and financial discipline. Let TSAT’s Trusted Advising help you make the best decision for you personally, your small business, or both!
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