Debt snowball and the debt avalanche are the two prominent loan payment strategies with different outcomes. The debt snowball method refers to paying off the smaller outstanding first so that the borrower gets mental satisfaction. On the flip side, the debt avalanche strategy directs to repay the loans with maximum interest cost first so that the borrower can achieve financial stability quickly.
In a nutshell, the debt snowball strategy focuses on mental stress arising from multiple loans whereas the debt avalanche method is an economical approach to avoid financial strains coming from the costly debts.
Practical Illustration
From the below tabs, you can easily see the practical demonstration of the both debt payment methods.
Debt Snowball Method
Pay off your debts in the following order:
- Payday Loan – $500 (Smallest balance, regardless of interest rate)
- Credit Card 1 – $1,200 (Next smallest balance)
- Credit Card 2 – $2,500
- Car Loan – $10,000
- Mortgage – $150,000 (Largest balance)
Focus on paying off the smallest balance first while making minimum payments on other debts. Once the smallest debt is paid off, move to the next smallest debt, and so on.
Debt Avalanche Method
Pay off your debts in the following order:
- Credit Card 2 – $2,500 (Highest interest rate, regardless of balance)
- Credit Card 1 – $1,200
- Payday Loan – $500
- Car Loan – $10,000
- Mortgage – $150,000 (Lowest interest rate)
Focus on paying off the debt with the highest interest rate first while making minimum payments on other debts. Once the highest interest debt is paid off, move to the next highest interest debt, and so on.
What are the core differences?
Primarily, the snowball method focuses on the smallest outstanding balance first whereas the avalanche strategy refers to paying off the most expensive debts first.
Below is a side-by-side comparison table between the debt snowball and ava;anche method:
| Feature | Debt Snowball | Debt Avalanche |
|---|---|---|
| Primary Focus | Paying off the smallest balances first | Paying off the highest interest rates first |
| Motivational Aspect | Quick wins by eliminating smaller debts | Financial savings by reducing interest costs |
| Interest Cost | Potentially higher overall interest paid | Lower overall interest paid |
| Debt Repayment Speed | Slower overall repayment due to higher interest costs | Faster overall repayment due to lower interest costs |
| Emotional Benefit | Boosts motivation and momentum with quick victories | Less immediate satisfaction but greater long-term gains |
| Complexity | Simpler to manage and track | Requires careful tracking of interest rates |
| Best For | Individuals needing quick psychological wins | Individuals focused on minimizing total interest paid |
| Example Strategy | Pay off a $500 debt before a $5,000 debt, regardless of interest rates | Pay off a 20% interest debt before a 10% interest debt, regardless of balance |
| Impact on Credit Score | Positive due to quick reduction in number of accounts | Positive due to significant reduction in high-interest debt over time |
In the debt avalanche method, there is no short-term motivating factor for the borrower because the most expensive loans can take more than a year to repay. But, in the snowball method, the borrower gets to see loan repayment success quickly due to targeting the smallest amounts primarily.
Moreover, The debt snowball strategy does not consider interest cost as it primarily suggests repaying the smaller amounts. However, the debt avalanche strategy is an economical approach that saves extra interest for the borrower and creates additional possibilities for savings.
The debt repayment speed of the snowball method is faster than the debt avalanche method due to the nature of both methods. More importantly, the debt avalanche method does not consider the emotional benefits of the borrowers.
Borrowers with strong debt payment dedication, financial discipline, and income stability are suitable to apply the debt avalanche method. Whereas the snowball approach only targets the smaller payments at the beginning that do not need strong financial discipline.
From the aspect of complexity, the snowball method is easier to follow than the debt avalanche as it requires a long-term financial commitment from the borrower.
Both methods have a positive impact on the borrower’s credit rating. However, in the debt avalanche strategy, credit score improvement is noticed more slowly than in the snowball method.
Who should follow the debt snowball method?
The snowball method is appropriate for someone having mental stress resulting from the increased number of loans. Also, borrowers with inconsistent financial commitment should follow the debt snowball strategy.
Below are the types of borrowers to whom the debt snowball strategy applies:
- Individuals who are motivated by seeing quick progress will benefit from the debt snowball method.
- If you find it challenging to stay motivated over the long term without frequent positive reinforcement, the debt snowball method is ideal.
- Those with several small debts might find it easier to manage their finances and see quicker results by using the debt snowball method.
- For people who have difficulty sticking to a long-term financial plan, the immediate rewards of the debt snowball method can help reinforce positive financial behaviors.
- If managing multiple debts feels overwhelming, focusing on paying off the smallest debts first can make the task feel more manageable.
In general, low-income earners, recent graduates, and borrowers with inconsistent incomes should apply the debt snowball approach.
Who should apply the debt avalanche strategy?
The debt avalanche strategy is best suited for individuals who prioritize minimizing interest costs and can stay disciplined over the long term. Here are specific profiles and situations where the debt avalanche method is recommended:
- People who are primarily concerned with minimizing the total amount of interest paid over the life of their debts will benefit from the debt avalanche method.
- Those who can maintain financial discipline and stay committed to a plan over the long term are ideal candidates for the debt avalanche method.
- Individuals with substantial high-interest debts, such as credit card balances with high annual percentage rates (APRs), will find the debt avalanche method particularly beneficial.
- People who prefer a logical, data-driven approach to financial management will appreciate the debt avalanche strategy.
- Those who are focused on long-term financial health and are less concerned with immediate gratification will find the debt avalanche method aligns with their goals.
So, people with high debt balances, stable incomes, and strong financial dedication get significant help from the debt avalanche method. Especially, if someone needs debt relief, whether with settlement or a debt management plan can become beneficial with the avalanche payment method.
Which is cost-effective, debt snowball or debt avalanche?
The debt avalanche method is the most economical approach to repay the loan as the method targets the high-interest debts first. In the snowball method, borrowers focus on paying a smaller amount regardless of the interest impact.
The debt avalanche method can lead to a faster overall debt repayment because it reduces the principal of high-interest debts more quickly, which decreases the amount of interest that can accumulate.
Although the debt snowball method provides quick wins that can boost motivation, these wins do not necessarily contribute to a faster repayment of the entire debt, especially if high-interest debts are not prioritized.
Conclusion
You need to carefully choose your debt payment method depend ing on your priority. If you are a low earner, this is better to apply the debt snowball approach because the avalanche method requires long term financial commitment and consistency.
