Debt Snowball vs Debt Avalanche - Find Out Which One Is Right For You

Stuck between two payment strategies? The debt snowball and debt avalanche have same end goal for re payers that is to be debt free. Find out which is best suited for you.

Updated by Jason Joy Manoj on 7th November 2019

It is recorded that roughly one-sixth of the US population older than the age of 18 owe about $1.5 trillion in federal student loan debt and roughly  $119 billion in student loan debt from private sources. Student loan debt is a serious issue and if you have problems with your debt you are not alone.

Your repayment towards your student loans plays a huge role in how you can manage your debt. The most common repayment strategies are debt snowball and debt avalanche. Both have their own unique features and both are known are proven to work well. It depends on the individual’s financial condition. Let us learn more about each repayment strategy and find out which one is right for you.

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Debt Snowball vs Debt Avalanche: Which is the right fit for you?

Before going into the details on which one is ‘right’ for you will have to know that both of these methods will lead to a debt-free life. It depends on whether you are a saver or a spender, what get’s you motivated while you go about repaying your loans. 

Here are some questions a borrower needs to ask oneself while deciding between a debt snowball and a debt avalanche method -

  • Do little wins help you stay motivated during the repayment of your loans?

  • Are you willing to pay off the higher-interest debt to try and save more in the long run?

Use an online calculator to try and find out how much you can potentially save. Be well aware of how much you will have to pay back and how much time it will take you to get out of debt.

Your interest rate plays a huge role in deciding what is the right method to go about repaying your loans. With the help of the debt avalanche method, you can save money and time during your repayment period. 

If you have a hard time making payments towards your loans then you should choose the debt snowball method. It should be noted that you don’t have to choose you can use a combination of both the methods.

Debt snowball method

The motive behind this strategy is to try and start paying off the student loans with smaller balances first and then move on to the loans with larger balances. It should be noted that while you pay your loans with lower balances first you need to maintain minimum payments to be made on the loans with higher balances.

Let us better understand this with an example: consider a borrower with student loans having balances of $ 16,897, $ 8,945 and $1,256. If you decide to go ahead with the snowball method then you should :

  • Pay off the $1,256 loan by paying as much as you can towards this loan amount

  • Maintain minimum payments on the $16,897 and $8,945 loan

Prioritization is key here, although you strategize to pay off the largest loan balance a borrower should keep all the loans in check and maintain a healthy standing with them. This can be done by making on-time payments, the payments can be minimum payments.

On making the payments on-time you can boost your credit score as well. In the case of the snowball method prioritization works on targeting the smaller the balances and then start targeting the other balances. After you are done with the $1,256 you can target the loan having a balance of $8,945 and then the loan balance of $16,897. 

There is one major upside to this kind of pay off strategy, the motivation you get after you pay off a particular loan. The major downside is the fact that it takes a long time to pay off your debt using this strategy when compared to the avalanche method.

Pros and cons of the debt snowball method 

Let us dive into the pros and cons of this repayment strategy to understand if it is the right strategy for you:

Pros of debt snowball method

  • It is a proven method to help a borrower pay off their debt 

  • When the smaller funds are freed up then you open up funds to focus on your balances to be cleared

  • This kind of repayment strategy helps them in achieving a quick sense of accomplishment after tackling the smaller payments first

Cons of debt snowball method 

  • The time to pay off all your debt may take a long time 

  • There are chances of you paying more interest over the total repayment term

If you are overwhelmed with the amount of debt in your hands then the debt snowball method is a great option to go for. It should be noted that the amount of interest to be paid will be higher as the focus on repayment will be on the smaller balances first.

When you should consider debt snowball method 

If you are a borrower with a number of loans then dealing with a number of debt obligations becomes difficult. By paying off the smaller loan amounts you ease out this difficulty. It is advised to start considering store credit cards, small loans or the money borrowed from friends and family.

When tackling a large burden of debt a feeling of accomplishment is hard to come by but with the debt snowball method, after clearing out smaller you do feel a sense of accomplishment. As per the Harvard Business Review, a study was conducted on the basis of how the participants of the review who had focused on clearing out smaller debts first had felt a sense of accomplishment. And felt like they were progressing towards their repayment journey. 

Debt Avalanche Method 

Under this repayment method, you will have to start paying the loan with the highest interest rate and also keep making the minimum payments on the other loans. The prioritization here is done based on the interest rates.

Take an example where a borrower has the following interest rates and 8%, 7.6%, and 3.2%. As per the avalanche method, you would consider paying off the loan with the 8% interest first. After which you would go about paying the 7.6% interest loan and then proceed to the loan with a 3.2% interest rate.

Pros and cons of the debt avalanche method 

Still in doubt whether this strategy is right for you, here are the pros and cons of the debt avalanche method to help you decide - 

Pros of debt avalanche method 

  • You can expect to save on interest using this strategy

  • Paying off loans is faster using this strategy

Cons of debt avalanche method 

  • While repaying with debt avalanche method you won’t see progress as much as you would with a debt snowball method

When you should consider the debt avalanche method 

When you have a number of student loans with different interest rates then it will be difficult for you to keep track of the loans. By making minimum payments towards your loans there isn’t much of an impact on the principal amount. So your overall pay off-plan isn’t that effective.

On repaying your loans with the avalanche method you continue to make payments towards all your outstanding student loans while making extra payments towards the loan with the highest interest rate. After which you can start targeting payments towards the loan with the next highest interest rate.