Debt avalanche method: how to pay off high-interest debt faster
Key takeaways
It prioritizes making larger payments on high-interest debt.
Pros of the debt avalanche method include efficient debt payoff while cons include a lack of early wins.
Explore common questions about the debt avalanche method, compare it to other debt repayment strategies, and make your own plan.
What is the debt avalanche method?
The debt avalanche method is all about making larger payments on your loans or debt with the highest interest rates.
How it works (step-by-step)
You’ll gather information on your debts, listing them out with the highest interest rate first. You’ll keep making the minimum payments on all your debts, but you’ll increase your payments on debt with the highest interest.
Why it’s called “avalanche”
The name applies because you tackle your high interest debt first, which is a small step that makes a large impact over time.
Step-by-step: How to implement the debt avalanche method
- List all your debts: List debt like auto loans and credit cards, including their balances, minimum payments, and interest rates.
- Order them by interest rate: Reorder that list of debt from highest interest (top of the list) to lowest interest (bottom).
- Make minimum payments on all debts: Make your minimum payments on every debt you’ve listed.
- Apply any extra payment amount to the highest interest debt: Any funds not accounted for in your budget can then go toward making larger payments on your high-interest debt.
- Once top debt is paid off, move to next highest interest: When you’ve paid off your debt with the highest interest, move any extra funds to your debt with the next highest interest rate. Repeat until everything is paid off.
Why use the debt avalanche method? (pros)
Saves you more money on interest over time
Paying down loans with high interest first generally saves more money as time goes on.
Often shorter overall repayment time
By prioritizing higher-interest debt, the debt avalanche method can reduce the total interest paid over time, which may shorten repayment timelines for some borrowers.
Clear, logical order and strategy
It eliminates confusion about how much to pay on your debts and gives you more direction on how to pay it all off.
Potential drawbacks & when it might be challenging (cons)
Slower early “wins” – motivational difficulty
You won’t see a huge difference at first, so you’ll have to keep yourself motivated until you see some wins.
Requires discipline and extra payments
Rather than spending your extra money, you’ll need to be disciplined enough to use it for making extra payments.
Might not fit everyone’s psychology
Not everyone is motivated by the same things or understands things in the same way, so this method might not be a fit for every person with debt.
Debt avalanche method vs other strategies
Avalanche vs snowball
The snowball method means you pay off your smallest debt first instead of prioritizing high-interest debt. It creates quicker wins but isn’t necessarily the most efficient method.
When avalanche makes more sense
The debt avalanche method makes the most sense when you have debt with high interest rates and you’re able to stick with your debt repayment strategy — even when wins aren’t quick to appear.
When another strategy might be better
If you don’t have much high-interest debt and you know you work best with small wins, you may want to pick the snowball method or another debt repayment plan.
Tips to make the debt avalanche method work for you
- Create (or update) a budget to help you free up extra money.
Set up autopay so you never miss your minimum payments.
Keep tabs on your interest rates and adjust your plan accordingly if a variable loan suddenly becomes your highest interest debt.
Celebrate your progress to stay motivated, especially since paying off your debt can take a while.
Avoid taking on new, high-interest debt if you’re still paying off existing debt.
Consider consolidating or refinancing, but only if it results in lower interest rates and still fits into your debt avalanche plan.
Use a spreadsheet or an app to help you visualize how those extra payments will speed up debt payoff.
Common mistakes to avoid
- Focusing on the debt amount, rather than the interest rate.
Missing or falling behind on any of your debt payments, which undermines your credit score and leads to additional fees.
Ignoring the interest rate on a variable loan, as the rate could climb and require that you shift your extra payments around.
Giving up on your debt repayment plan because you haven’t yet hit a big milestone. Staying consistent is the entire key to this strategy.
Taking on new, high-interest debt during your debt avalanche plan, which reorders your priorities and stalls your progress.
The debt avalanche method can be an efficient way for many people to pay off their high-interest debt. Consider the pros and cons of the debt avalanche method, then create a plan that will help you stay consistent and eventually repay your debts.
While debt repayment focuses on reducing interest costs, some people also maintain separate savings for emergencies. High-yield savings accounts are one option to explore for holding short-term funds.
Frequently asked questions
How much extra should I pay toward the top-interest debt?
After accounting for all necessary expenses in your budget, any remaining money is typically put toward your top-interest debt.
What if my highest-interest debt has the largest balance and it will take a long time to pay off?
Prioritizing higher-interest debt is often discussed as a way to reduce interest costs over time, even when balances are large.
Can I use the debt avalanche method with student loans, credit cards, personal loans, etc.?
The debt avalanche method works for paying off a variety of loans, including student loans, credit cards, personal loans, and more.
Does the debt avalanche method work for everyone?
The debt avalanche method can be an efficient repayment option but doesn’t work perfectly for everyone because it requires patience and consistency.
What happens after I pay off the last debt in the sequence?
Once you’ve paid off the last debt in your list, it’s time to celebrate being debt-free. From there, people often reassess their broader financial goals, which may include saving, investing, or other priorities depending on their circumstances.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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