Paying off debt can be a stressful experience at the best of times. But paying off multiple debts simultaneously can certainly feel overwhelming. How much should you pay towards each debt? Which one should you focus on first? In this post, we’ll look at two of the most prominent methods of paying down multiple debts (except mortgages or UK student loan debt; these aren’t relevant in this case). These are called the snowball method and the avalanche method.
Both methods involve paying only the minimum payment towards all debts except for one, until this one debt is paid off. The process is then repeated with the next debt, until all debts are gone. We’ll delve into the differences, advantages, and disadvantages to each method below.
But first, I need to stress that both the snowball and avalanche method rely on a few assumptions being true; they are unlikely to be effective otherwise. If the below assumptions are not true for your situation and you believe you’re in a position where you may not be able to pay off your debts, then please seek advice from a qualified debt specialist (I’ll include some of these services at the end of this post). These assumptions are:
- You can make at least the minimum payment on all your debts each month without taking on more debt.
- You can afford to regularly pay off more than the minimum payment on one of your debts each month.
- You have a regular income and do not anticipate being made redundant or have hours reduced in the near future, preventing you from being able to continue payments.
- You do not intend to continue using the credit cards you are paying off or take out additional debt.
The Snowball Method
The “snowball” method of paying down debt involves focusing all efforts on paying off one balance at a time, in order of smallest to largest. The smallest debt is paid first, and the largest paid last. As each debt is being focused on, only the minimum payment is to be made for all other balances.
Doing this creates a “snowball” effect. The smallest debt will be settled quickly and the minimum payment originally required on this balance can instead be used to pay down additional debt on the next balance. As each debt is settled, the amount of money available increases further, meaning the next debt is repaid more quickly.
The main advantage to this method is that it provides a feeling of progression. The first debt can be paid off quickly, allowing the account to be closed (if applicable) and increasing the available money to pay off the next debt. For those who feel they do not have a huge amount of discipline when it comes to their finances, the snowball method can provide additional motivation and easy-to-reach ‘checkpoints’, seeing improvement as each account is settled.
However, there is a drawback to the snowball method. Because the debts are ordered from smallest to largest, and ignores the interest rate entirely, it is highly likely you’ll be paying more interest over the long-term compared to the avalanche method.
Snowball Example:
Here is an example of the Snowball method in action. Let’s assume you have the following four debts:
- A personal loan with £8,000 remaining to be paid off, at 9% interest
- A car loan with £6,000 remaining to be paid off, at 6% interest
- A credit card with a balance of £4,000 and an interest rate of 29%
- A credit card with a balance of £2,000 and an interest rate of 22%
Using the snowball method, we would concentrate on paying off the smallest debt first. In this case, the credit card with a balance of £2,000. Next, we would focus on paying off the £4,000 credit card balance. Next in line is the £6,000 car loan and then, finally, the £8,000 personal loan.
The Avalanche Method
The “avalanche” method instead involves paying off the balances in order of interest applied to the debt, i.e., the APR, from highest to lowest. In other words, take the debt with the highest interest rate first, and focus on paying this debt off, paying only the minimum payment on all other debts. Once the first debt is settled, move onto the debt with the second-highest interest rate, and so on.
Doing this causes an ‘avalanche’ of sorts, because you’re removing the most impactful and expensive debts first, leaving the debts with the smallest long-term impact to be paid off last.
The main benefit to this is that, while it may take longer to pay off that first debt (depending on its size), this method minimises the amount of money being repaid in interest over the long-term. This is the most efficient method of paying down debt and will more than likely save you money compared to the snowball method.
However, this benefit comes at a cost. The avalanche method requires a much higher level of discipline to accomplish. That first debt could take time to pay off, meaning you may not feel a sense of progress for months, even years. Once that first debt is settled, though, the other debts become much easier to handle.
Avalanche Example:
For the avalanche method, we would concentrate on the highest interest debt first. Using the same debts and interest rates from the example above: we would first focus all our attention on the £4,000 credit card balance. Then we’d focus on the £2,000 credit card balance. Next, we would then tackle the £8,000 personal loan, and finally, the £6,000 car loan.
Which Method Should I Choose?
Before we delve into the question of whether to use the snowball or avalanche method, ensure you have each of your debts written down (on paper or in a spreadsheet) and in front of you. Be fully aware of the total debt you currently have. Be aware of how much each debt has remaining and the respective APR (interest rate) on each debt. Now you have this information, you can think about how to tackle paying each debt off.
Unfortunately, the answer to the above question isn’t always clear-cut; It will generally depend on two things:
- The number of debts there are, the amount owed, and the interest rates being charged
- The psychological state of the person(s) paying off the debt, and their relationship with money
The ‘snowball’ method provides short-term satisfaction, which can help provide motivation to those who have a poor relationship with money. The first debt will be the smallest, meaning it can be paid off in the least amount of time. This can motivate you to stick to your payment plan and not become demotivated by slow progress. However, this method does result in paying more interest in the long-term. But, if you believe the avalanche method isn’t compatible with your psychology, then consider the snowball method instead. It is better to pay a little more interest, rather than not sticking to your plan at all. Thus leading to a higher amount of interest in the long-term anyway.
The ‘avalanche’ method, on the other hand, is great for those who already have a lot of self-discipline. Those who can sufficiently manage their money and aren’t phased if the first debt takes longer to pay off. Though your first debt may take longer to pay off, it will usually result in paying less interest over the long-term compared to the snowball method.
Debt Advice Services:
Do you believe neither the snowball or avalanche method are feasible in your situation? Then it might be time to consider seeking free debt advice. Never pay for debt advice. There are plenty of great free services already available.
Here are two of the best free services in the UK:
