Two popular debt repayment strategies
Two widely used methods help borrowers manage multiple loans and decide how to allocate extra funds. Both rely on continuing minimum payments while directing any extra money toward one debt at a time.
How the two methods differ
The debt avalanche method targets the loan with the highest interest rate first, aiming to minimize overall interest costs. Once the top loan is paid, you move to the next highest rate, and so on.
The debt snowball method focuses on the smallest outstanding balance first, providing quicker psychological wins and momentum as you eliminate accounts one by one.
Pros and cons
- Debt avalanche can save more money on interest over time but may require longer before you see debt disappear.
- Debt snowball can provide faster wins and motivation, even if the total interest paid is higher in some cases.
How to decide which method suits you
Consider your personality, your budget, and your emotional response to progress. If motivation matters, the snowball may work best; if minimizing interest is the priority, the avalanche could be better.
Practical steps to implement
- List all debts with current balances, minimum payments, and interest rates.
- Continue paying minimums on all loans.
- Apply any extra money to the chosen debt strategy until all loans are cleared.
- Reassess and adjust if new debt is incurred or rates change.
