An avalanche method is a debt-reduction approach that entails paying off your debts from the highest to the lowest interest rate to help you stretch out a debt-free lifestyle. So, if you have credit card debt with an incomparably high interest rate, you make it your primary objective while making minimum monthly payments on your other debts. When your credit card debt with the highest APR is settled, you move on with the next highest interest rate debt. If you opt for this method, you not only pay off all of your debts quickly but also lower the interest charges you pay each month.
Loans to Include in a Debt Avalanche
Which sorts of loans should be addressed using the debt avalanche method? Here are some of the most common loan types:
- Credit card debt
- Title loans
- Personal loans of any kind
- Medical bills
- Short term loans such as payday loans or dollar cash advances
Once again, irrespective of the debt type, you need to prioritize the highest interest obligation over all others and keep paying it down until you get debt-free.
How to Employ the Debt Avalanche Method?
How can you start using the debt avalanche method to pay down all your debts? The primary steps are as follows:
- Make a list of all your outstanding obligations.
- Sort your debts by interest rate, starting with the highest and working your way down.
- Make a spending plan. When you track your income and expenses, you can determine how much extra money you can set aside to direct toward repaying the highest-interest loan on your checklist.
- After you've paid off your highest-interest loan, go on to the next one on your list. Maintain this strategy until you have paid off all your debts.
An Example of Debt Avalanche Strategy
Assume you have four outstanding debts you want to pay off using the debt avalanche method. Here is how they'll appear based on the highest to the lowest interest rate debts.
In this case, you should prioritize your credit card debt with a skyrocketing APR of 21.99 percent. If you have an additional $50, you can add to the credit card minimum payment and make a bigger monthly installment every month. You will pay $180 each month until your credit card balance hits zero. After you have liquidated your credit card debt, you should go forward to the personal, student, and auto loans accordingly. As a reminder, you shouldn't forget to make a minimum monthly payment of low-interest loans while focusing on the high-interest ones.
Advantages and Drawbacks of the Debt Avalanche Method
One of the primary benefits of using the debt avalanche approach is that you start with the highest interest debt and work your way down. In the long run, this may save you a significant amount of money in interest. On the other hand, the debt avalanche technique may be unsatisfactory since the highest interest debt may also be the loan with the greatest sum. If this is the case, it may take longer to see results, plus it may be difficult to keep up with the avalanche approach. If you are looking for a method that guarantees quick results, check out our article on the Debt Snowball Method.