How to Use a Debt Avalanche Strategy to Pay Off Loans

How to Use a Debt Avalanche Strategy to Pay Off Loans

January 20, 2022

Let’s be honest, staring at a pile of debt can be incredibly stressful. It’s easy to feel like you’re just spinning your wheels, making minimum payments and watching your balances – and interest – slowly creep up. But there is a better way! Today, we’re diving into the debt avalanche strategy, a fantastic method for paying off your loans quickly and efficiently.

What is the Debt Avalanche Strategy?

The debt avalanche strategy, also known as the "highest interest rate first" method, is all about prioritizing your debt repayment based on the interest rate you’re paying. Instead of focusing on the smallest balance first (as the snowball method does), you concentrate your extra payments on the loan with the highest interest rate. Think of it like attacking the biggest threat to your financial health.

Here’s How it Works – Step-by-Step:

1. List All Your Debts: Start by listing every debt you have – credit cards, student loans, personal loans, auto loans – everything! Include the outstanding balance, the interest rate, and the minimum monthly payment for each.

2. Order by Interest Rate: Now, arrange your debts from highest interest rate to lowest. This is the core of the avalanche strategy.

3. Pay the Minimum on Everything Else: Make your minimum payment on all of your debts, except for the one with the highest interest rate.

4. Attack the Highest Interest Rate: Throw every extra dollar you can afford at that highest interest rate loan. This is where you’ll see the biggest impact.

5. Repeat: Once that highest interest rate loan is paid off, roll the entire payment you were making on it into the next highest interest rate loan. Continue this process until all your debts are gone!

Example:

Let’s say you have these debts:

• Credit Card A: $5,000 balance, 20$100 minimum payment
• Credit Card B: $3,000 balance, 15$75 minimum payment
• Student Loan: $10,000 balance, 6$150 minimum payment

With the debt avalanche strategy, you’d focus all extra payments on Credit Card A (20% interest) until it’s gone. Then, you'd apply that full $100 to Credit Card B. Finally, you’d put everything towards the student loan.

Why It's Effective:

• Saves You Money: By targeting the highest interest rates first, you minimize the amount of interest you pay over the life of your loans.
• Faster Payoff: You’ll typically pay off your debts faster than with other methods.
• Motivational: Seeing the interest charges drop significantly can be incredibly motivating!

Resources to Help You Get Started:

• Free Debt Payoff Calculator – Use this to estimate your payoff timeline.
• Debt Management Resources – NerdWallet has a great overview of debt management strategies.

Do you have questions about the debt avalanche strategy? Let us know in the sections below!