Debt Snowball vs. Debt Avalanche: Do these repayment methods really work?

Dubai: Paying off debt can feel overwhelming, but using the right strategy can make the process more manageable. Two popular methods to accelerate debt repayment are the Debt Snowball and Debt Avalanche strategies. While both aim to reduce outstanding debt, they approach it differently. Understanding how each method works can help you choose the one that fits your financial goals.

Debt Snowball

The Debt Snowball method involves paying off the smallest debt first. Once that debt is cleared, you apply the amount you were using for that payment to the next smallest debt, continuing this process until all debts are paid off. This method works on the principle of momentum. By tackling smaller balances first, you experience quick wins, which can boost motivation to stay on track.

For example, if you have three debts—credit card debt, a car loan, and a student loan—you would pay off the smallest balance first, then move to the next. This approach can provide a sense of accomplishment and keep you motivated.

Debt Avalanche

The Debt Avalanche method focuses on paying off the highest interest rate debt first. After clearing the high-interest debt, you move on to the next highest rate, and so on, until all debts are eliminated. This method saves money in the long run by reducing the total amount of interest paid over time.

For instance, if you have a credit card balance with an 18.99% interest rate, a car loan at 3%, and a student loan at 4.5%, you’d start by paying off the credit card debt. Once cleared, you move to the car loan and finally the student loan. The focus here is on minimizing interest expenses.

Which is better?

The best method depends on your personal situation. The Debt Snowball method is ideal if you need motivation from seeing quick results. Paying off smaller debts first can create a snowball effect that keeps you moving forward.

The Debt Avalanche method is suited for those who prioritize saving money on interest. Although it may take longer to pay off a debt, focusing on high-interest loans first helps you pay less in the long run.

How to apply them

To apply these strategies, organize your debts. For the Snowball method, list them from smallest to largest balance. For the Avalanche method, list them from highest to lowest interest rate. Allocate any extra funds to the top debt while making minimum payments on others.

Bottom line?

Both the Debt Snowball and Debt Avalanche methods can effectively help you pay down debt. The Snowball method is ideal if you need quick wins for motivation, while the Avalanche method is best if you want to minimize interest and save money. Whichever strategy you choose, the key is staying committed and focused on your end goal of becoming debt-free.