LOS ANGELES, Oct. 27, 2021 (GLOBE NEWSWIRE) -- Many people struggle to climb their way out of debt, especially when they have numerous other bills to worry about. The key is to follow a proven debt payoff strategy that works for the borrower's situation.
Two common payoff methods borrowers can use to eliminate debt are the debt snowball and debt avalanche methods. Plenty of people use both methods to pay down their debts, but they differ slightly in approach.
Here's how the debt snowball and debt avalanche methods work and the pros and cons of each.
What is the debt snowball method?
The debt snowball method has the borrower focus their efforts on the debt with the smallest principal first, while making minimum payments on all other debts. Once they pay off the smallest debt, they can move onto the next smallest, until they eventually pay off all their debts.
For example, imagine a borrower has $1,000 remaining every month after expenses and they have three debts, each with a $50 minimum payment. These debts are:
- $5,000 student loan at 3.5% interest
- $4,000 car loan at 4% interest
- $3,000 credit card debt at 20.99% Annual Percentage Rate (APR)
Using the Debt Snowball method, the borrower would pay $50 on the student loan and $50 on the car loan, leaving them with $900. They could then pay this $900 toward the credit card. The theory is that paying the smallest debt first provides a quick win for the borrower. This can help motivate them to keep paying off larger debts.
What is the debt avalanche method?
The debt avalanche method has the borrower focus on the debt with the highest interest rate first. They can work on paying this debt off while making minimum payments on all other debts.
This time, perhaps the borrower's debts are as follows:
- $5,000 student loan at 3.5% interest
- $4,000 credit card debt at 20.99% Annual Percentage Rate (APR)
- $3,000 car loan at 4% interest
In this case, the borrower would focus their efforts on paying off the credit card debt first, since it has the highest interest rate, and they would make the minimum payments on the other debts.
The debt avalanche method may not give borrowers that good feeling of getting rid of their debts as fast, but it can help them save money by not paying as much in interest rates over time.
Which method should borrowers use?
If a borrower only has low-interest debt, such as mortgages and car loans, the debt snowball method may be the right option. That faster win could motivate them to keep going. Borrowers with high-interest debt, such as credit cards, may be better off by following the debt avalanche method.
Eliminating debt with either strategy is possible. Borrowers should choose one that works best for them and stick to it. Ultimately, consistency will help borrowers pay down their debts.
Notice: Information provided in this article is for information purposes only. Consult your financial advisor about your financial circumstances.
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