Turbo Takeaways
- Debt avalanche involves prioritizing payments toward debts with the highest interest rates.
- This method is the opposite of the debt snowball, which prioritizes paying off debts based on their total balance.
- Debt avalanche is managed by the consumer, not a debt relief organization.
What Is the Debt Avalanche Method?
Debt avalanche is a solution that involves paying off your debt with the highest interest rate first, then continuing until all debts are eliminated.
Consumers typically choose this method to reduce high-interest debt instead of focusing on the debt with the highest balance. After clearing the debt with the biggest interest rate, consumers can apply the savings from interest fees toward other debt repayments.
Why is it called “debt avalanche?”
Experts named this method “avalanche” because as you pay off debts, repayments and savings become bigger, like a wave of snow coming down a hill.
Ideally, by paying off accounts with high interest, you avoid the expense of compound interest. It’s also a good idea to look at the account’s Annual Percentage Rate (APR) to get an idea of how much you’d save each year by paying off the debt early.
What’s interesting to note about debt avalanche is that it doesn’t tackle debts based on their total amount, but rather by their interest. That means you could end up paying toward a smaller debt before a larger one if the interest payments are higher.
How Does Debt Avalanche Work?
Debt avalanche is an effective DIY debt relief method for consumers with long-term financial goals. This option works best when individuals follow through with debt payments over a period of at least 12-24 months.
- Create a Budget
Set up a realistic budget so you know exactly how much you can put toward debt each month after covering essential bills. - List Debts by Interest Rates
Rank every debt from the highest to the lowest interest rates, not by their total balances. This means you might pay off a smaller debt first if its interest payments are higher than those of a larger one. - Target the Highest-Interest Debt First
Pay the minimum on all other debts and throw every extra dollar at the account with the highest interest rate. - Roll Payments to the Next Debt
When that top-rate debt is gone, roll its full payment amount onto the next highest on your list, keeping all other minimums current. - Keep Making Payments
Continue moving down the list, stacking payments as you go, until all listed debts are paid off. Each payoff frees up more cash and speeds up the next one.
Example of Debt Avalanche
To see how the debt avalanche works in practice, imagine a borrower named Lucas with three high-interest debts: a credit card, a personal loan, and a car loan.
Lucas decides he can put $1,000 toward debt each month and commits to sending that same amount every month.
- Lucas starts the avalanche by making only the minimum payments on his personal loan and car loan, and sends all the extra money to the credit card debt, which has the highest interest rate.
- When the credit card is paid off, he keeps making the same minimum payment toward the car loan, but redirects the freed-up money to his personal loan.
- After paying off his personal loan, Lucas finally throws the entire monthly amount at his car loan. Because he’s been making minimum payments on it all along, the remaining balance is much smaller and is wiped out quickly.
Debt Avalanche vs. Debt Snowball
While similar in the practice of growing debt payments over time, avalanche and snowball have different goals. In the debt snowball method, consumers make more payments toward their smallest balances. Snowball aims to pay off debts as quickly as possible to build momentum and use the savings toward larger debts.
Using the avalanche method, consumers pay off debt based on interest rates, putting the most funds toward high-interest debt balances. After paying off the account with the highest interest rate, consumers move on to the next debt and aggressively pay the interest and the principal as before.
Both DIY methods work best when you set goals and follow through each month. The snowball method is popular among consumers eager to see progress and end debts as quickly as possible by starting small and working up to big balances.
However, avalanche is favored by individuals who want to eliminate excessive interest payments first, even if it takes longer to clear all debts.
Debt Avalanche vs. Other Debt Relief Methods
Here’s a look at how debt avalanche compares to other effective debt relief methods:
| Debt Relief Method | How It Works | Payment Structure | Fees Attached | Average Time of Completion |
|---|---|---|---|---|
| Avalanche | Debts prioritized and paid off based on interest rates | Budget for monthly debt payments after meeting expenses | None | Varies |
| Management | Organization manages monthly payments to creditors | Monthly payments sent to organization to cover all debts | Enrollment fee plus monthly fees for each managed account | 24-48 months |
| Consolidation | Rolling multiple debts into a single new loan at a lower interest rate | Loan amount large enough to cover current debts broken into monthly payments | Interest payments | 24-48 months |
| Settlement | Debt balances reduced by settling with creditors for a lump-sum payment | Monthly payments deposited into savings account until enough for lump-sum payoff | 15%-25% of total debt enrolled after settlement | 24-48 months |
Using a debt avalanche method can be highly effective for reducing your debt, especially if you remain motivated and confident in your financial management skills. However, before diving into an avalanche, explore other debt relief options, such as debt settlement or consolidation, to ensure you choose the best approach for your financial needs.
Tips for Using Debt Avalanche
Here are some handy tips to maximize your debt avalanche plan:
Set Up Automatic Payments
You may find it easier to make consistent debt avalanche payments if you set up auto-pay for each account. However, it’s important to update the amount each time you clear a debt, changing the minimum payment on the next high-interest balance to a larger sum.
Put More Money Toward Repayments
Funneling as much of your income as possible toward debt repayment means you’ll pay off high-interest debts faster. Identify ways to cut spending and save or find an additional source of income to fund your pursuit of financial freedom.
Stay Motivated
Finding ways to stay motivated and pursue your financial goals matters nearly as much as your actual debt payments. Make avalanche an effective debt relief strategy by tracking progress, celebrating wins, and staying accountable through a family member, close friend, or financial advisor.
Is Debt Avalanche Worth It?
Using the debt avalanche method takes time and a commitment to making consistent monthly payments toward your debts. By eliminating debts with the most interest first, you can potentially save hundreds or thousands of dollars.
Debt avalanche isn’t necessarily a fast way to clear debts. Some may find debt snowball makes it easier to stay motivated by paying off balances faster.
Find Debt Relief With the Help of TurboDebt®
Another approach to debt relief is through an organization that handles debt settlement, consolidation, or management. In exchange for administrative account fees, you’re likely to pay off debts faster by leveraging professional accountability and expertise.
Professional debt relief companies like TurboDebt® offer programs tailored to your unique financial situation, offering a free consultation to start the process.
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