Between student loans, personal loans, car loans, and credit cards, the average American carries close to $40,000 in personal debt (not counting mortgage debt). Different forms of debt and loans can have varying interest rates, some of which can be very high.
The debt avalanche strategy is a method that can save you money on interest over time. With this method, you need to look at all your loans to determine which one has the highest interest rate. You will then make bigger payments on this loan while still making the minimum payment on all your other loans.
What Is the Debt Avalanche Strategy?
There are two common methods for paying off your debt faster when you have multiple forms of it: the debt snowball method and the debt avalanche method.
The debt snowball method attacks the smallest balance first. With this method, you can eliminate your smallest debt, then move on to the next, and so forth. This can seem more manageable and make you feel more accomplished.
The debt avalanche method does the reverse. You will go after the highest interest rate loans or debt first, so you can pay more on your principal sooner. The debt avalanche method can save you the most money on interest by paying off your most toxic debt first.
You will need to have some extra money freed up to pay more than your minimum payment every month. You will also need to be able to sustain this over a long period of time to make it effective.
How to Use the Debt Avalanche Strategy
The debt avalanche method takes time and precision, but it can help you get debt-free faster. Here’s how to do it:
- Break down your debt. Look at all your loans and credit card debt, and put them in order of highest to lowest by interest rate. Credit cards typically have high-interest rates, so you will want to pay those down first.
Private student loans can also have high-interest rates, as can some federal loans like Direct PLUS Loans. It can help to make a spreadsheet to keep track of all your debts, interest rates, and payment amounts.
- Put any extra money toward the loan with the highest interest rate. For example, if you have a student loan with an interest rate of 8%, a credit card balance that carries an interest rate of 20%, and a car loan with 4% interest, you should start with the credit card debt. Then, move on to the student loan, and pay off the car loan last.
- Keep paying your monthly minimum payments. Do this on all your loans and debt while paying more on your highest interest rate debt.
- Continue the strategy. Once you’ve paid off your highest interest rate loan, roll on to the next highest until you have paid off all your debt. Be patient and consistent.
Pros and Cons of Using the Debt Avalanche Method
The debt avalanche strategy can take time and discipline. It might be right for you if:
- You have extra money and are able to pay more than your minimum payment
- You are able to stick to a budget, and you are organized and focused
- You are patient and open to making sacrifices for a long period of time
- You have multiple forms of debt and wish to save money on interest over time
Student loans often have repayment terms of 10 years or more, so the debt avalanche strategy is a long-term one. It can require dedication and sacrifice to keep using your extra money to pay off your loans.
You will need to be analytical and dedicated. If you give up halfway through, the strategy is ineffective, and you won’t save the money you intended to save.
If you are looking for a more immediate win, the debt snowball approach might appeal to you more. With this method, you can eliminate some of your loans faster, which can feel more successful. However, you will end up paying more money overall. If you do better with instant gratification and need to see the number of your loans go down faster, the debt snowball method is a good option.
Paying Off Debt
When it comes to paying off your student loan debt, there are several repayment options to choose from. Federal student loans have some of the most flexible repayment plans. They frequently have loan terms of 10 years with interest rates between 5% and 8%.
Private student loans don’t usually have the same benefits, like loan deferment and forgiveness programs, that federal student loans have. They can sometimes have interest rates as low as 3%, however.
The debt avalanche strategy can help you pay off your student loan debt earlier than the 10-year term, but it will likely still take years to accomplish. To use the debt avalanche method to pay off student loan debt, contact your loan servicer when making payments.
If you are paying more than your minimum payment amount each month, you will need to let them know that you want the extra money to go toward your principal instead of interest.
Credit cards are a form of revolving credit, which means that you don’t borrow all the money at once. Rather, you can borrow up to a set amount. Your monthly payments for this type of debt can change month to month, depending on how much you borrow.
The debt avalanche strategy can be used for both installment and revolving debt. If you are willing to take your time and pay extra each month, it can be an effective way to help you pay off your debt faster and pay less overall.