Debt Snowball Vs. Debt Avalanche

In the world of student loan repayment, you’ve probably seen or heard the terms “Debt Snowball” and “Debt Avalanche” before. But what do they mean, how can they help you more quickly pay off your debt, and how do you decide which of the two best fits your financial situation? 

First, What it Means: 

Both frosty terms refer to strategies for tackling and paying off multiple debts at a time. For both strategies, you need to start with an understanding of your loans, the amounts that you pay to each debt every month, and what those separate monthly payments total altogether. For example, if you have 3 loans that you pay toward monthly at $100, $50, and $75, you also need to know that those three constitute a monthly total of $225. 

Following this understanding, you then decide an additional amount you can pay toward your monthly total. In our example, let’s say we’re willing to pay $250 every month instead of $225. 

Where these strategies differ is in how we allocate the extra money we’ve decided to pay toward decreasing our debt. 

Debt Snowball – 

The philosophy behind the debt snowball method is to aggressively pay off smaller balances and work your way up to larger ones. Referring to our example again, let’s say our loan balances look like 

– $15,000 at 3.7% interest; monthly payments of $100
– $5,000 at 7% interest; monthly payments of 75$
– $2,000 at 4.5% interest; monthly payments of 50$

Because the $2,000 total is our smallest balance, we’d continue to make the minimum payments to all three, but we would additionally include the extra $25 toward the $2,000 balance. Instead of $50 a month, we’d pay off the $2,000 balance sooner with $75 monthly payments. When that smallest balance is completely paid off, we would then continue to pay a total of $250 toward debt repayment every month, but the $75 that we no longer pay toward the $2,000 balance would now all go to the next smallest. Instead of $75 every month to a $5,000 balance, we would now be paying $150 every month until that balance is also completely eliminated. Finally, we would be left with a full $250 to pay toward our largest balance of $15,000. 

The debt snowball method provides the mental and emotional reward of completely paying off one of your balances in a fairly short time frame. And because you continue to make payments toward your other balances, and are able to make higher and higher monthly payments to larger and larger balances, this method can be incredibly effective at motivating individuals who may otherwise feel debt fatigue. 

Debt Avalanche – 

In contrast to debt snowball, which is more rewarding emotionally, the debt avalanche method more mathematically effective. Instead of comparing balances, debt avalanche is all about interest rates. Using this method, we would allocate the extra $25 to the loan with the highest interest. In our example from greatest interest to smallest: 

– $5,000 at 7% interest; monthly payments of 75$
– $2,000 at 4.5% interest; monthly payments of 50$
– $15,000 at 3.7% interest; monthly payments of $100

So we would first pay $150 every month to the $5,000 until it is paid off. Then $200 to the $2,000, and finally $250 to the $15,000 balance. Because this method attacks the highest interest rates first, this method lets an individual save more on interest over the course of the loan, and pays off loans quicker. After all, an avalanche cascades faster than a snowball. 

Deciding Which Strategy is Best for You: 

At this point, you may be thinking that the debt avalanche strategy is clearly the better option. The Avalanche relies on mathematical reasoning and saves time and money. But at the same time, we are not numerical balances. The people paying off debt are people. And emotion, motivation, and (nearly) instant gratification are important in ways that a mathematical proof may not be able to substitute. 

Whether you prefer the satisfaction of paying off a loan in its entirety very early on, or whether you prefer the knowledge that your patience will be rewarded with an avalanche of completing your loan payments, the most successful strategy is the one that motivates you to stay consistent and vigilant toward paying off your debt. And only you can experiment and decide for yourself.