Avalanching Your Debt: How Does It Work?
As mentioned in a previous post, there are different types of debt repayment strategies. Following on from our looking into snowballing, in this article we will be looking at the avalanche repayment method, how it works, and whether or not this is the right choice for you.
What is Avalanching?
Avalanching is the strategy of paying off your debts by prioritising the one with the highest interest rates first. The goal is to eliminate your highest interest rate first, before moving onto the second highest interest rate and the third and so on. The target, is to minimise the amount of interest you pay, and this approach may help you pay off any debt you hold faster than other strategies like the snowballing method.
In theory, avalanching will save you money in the long term compared to snowballing your debt; as this will have you smashing the highest interest rate debt first. Remember: getting rid of the higher interest rate debt first (even if the total loan amount is smaller), means a lower total amount of money you’ll have to pay overall, if you tackle this one first.
However, this doesn’t mean this will work for YOU in practise, as it is usually a lot longer before you start seeing progress compared to avalanching as you are tackling debts with high interest rates first.
You have a loan of £15,000 at 4.2% interest, a credit card of £5,000 at 21.2% interest and another credit card of £3,000 at 28.5% interest.
If you were avalanching your debt you would tackle the debt with the 28.5% interest first, before moving on to the 21.2% interest and then finally putting all your money to the 4.2% interest. (to find out more about how interest works, click here!)
REMEMBER: YOU HAVE TO KEEP PAYING THE MINIMUM MONTHLY REPAYMENT OF ANY DEBT YOU HAVE, WHILST THROWING ANY EXTRA MONEY TO THE HIGHEST INTEREST DEBT.
Pro Tip: Debt consolidation could also be a smart strategy for you if you are looking at avalanching your debt. This is because you could get a cheaper rate for your total combined debt, and give you just one loan to smash at a lower combined interest rate than what you pay over your separate debts. However, make sure the interest you would pay is lower for the combined total than making individual payments.
Will This Help Me?
Any kind of strategy to pay of debt will of course help you. BUT remember only you know yourself, are you someone who can accept not taking short term wins and can play the long game?
Avalanching long term will you save you a lot of money compared to snowballing, but this is only if you actually stay committed to paying off your debt.
Debt is a huge psychological battle, which is why you have got to pick the right strategy that matches your own financial situation and your own mental state. People often don’t talk about the mental battle debt can put someone into – and just tend to post easy fixes, but the reality is not so simple.
As we always say at 3MoneyTalk – the key to tackling your own debt is making sure you have a plan, and stay motivated.
Make sure you pay off any consumer debt as quickly as you possibly can. Don’t overstretch yourself, and be realistic – you’ll be out of debt a lot sooner than if you have no plan, and just stressed yourself out.