How the Debt Avalanche Strategy Works
The debt avalanche strategy involves paying off your debts starting with the loan that has the highest interest rate. You will apply this amount to the highest interest loan after paying off the first one.
Example of the Debt Avalanche Method
Let’s assume you are in debt with the following loans. Based on your monthly budget, you have an extra $150 available each month to eliminate debt. Which loan should you pay off first?
Benefits of the Debt Avalanche Strategy
The debt avalanche strategy is effective because it focuses on interest rates. Part of your monthly payment goes toward paying interest on most loans while other parts reduce your debt balance. Paying more to cover interest costs with higher interest rates makes it harder to pay down the remaining balance as it gradually diminishes. You will waste as little money as possible on interest by reducing the total interest you owe, and your payments will work to reduce your loan balances.
Do I Need the Debt Avalanche Strategy?
The debt avalanche strategy may be suitable for you if you want to minimize your overall borrowing costs. If you believe in paying the lowest possible interest, if you have the discipline to keep making extra payments on a large debt for an extended period, if you do not need positive reinforcement repeatedly or early in the process, and if you are motivated by facts and figures.
Debt Avalanche Strategy vs. Debt Snowball Strategy
The debt avalanche strategy is an excellent option for reducing costs and getting out of debt, but it may not be suitable for everyone. The other option is the debt snowball method.
What to Do If You Need Additional Help Paying Off Your Debts?
The debt avalanche method may be a helpful solution for some people, but others may need additional guidance. You have at least two other options:
1. Credit Counseling: It might be better to seek help if you’re struggling to make your minimum monthly payments and don’t have enough money to cover your debt amount. Non-profit credit counseling agencies can offer guidance and education to help you gain control over your debts. They may even set up a Debt Management Plan (DMP), which can provide relief by lowering your monthly payments and interest rates. Credit counseling agencies typically charge a modest monthly fee to help you manage your debts.
2. Debt Settlement: Debt settlement is another option, but it’s a more extreme solution. It involves trying to pay less money than you owe to creditors with the help of a for-profit company, but there is no guarantee that your creditor will be willing to negotiate, and debt settlement programs can negatively impact your credit score. Since the debt settlement process affects your credit score and can take a long time, it is not recommended.
Frequently Asked Questions
Which is better: Debt Avalanche or Debt Snowball?
Is it better to pay off high-interest debt first?
Finally, thank you for your time and effort in reading this article. We hope it has provided you with the answers you need regarding the debt avalanche strategy and how to apply it to your financial life.
Source: https://www.thebalancemoney.com/get-out-of-debt-with-debt-avalanche-4140758
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