Snowball vs Avalanche: What is The Best Method to Pay Off Debt?
The vast majority of adults have one form of debt or another.
From your mortgage and student loans to car finance plans and credit cards, there are various types of debt that may feature in your financial history.
Although well-managed debt isn’t necessarily a bad thing, excess debt can be detrimental.
High interest rates or a poor repayment strategy can have a negative impact on your credit rating, for example, which could make it more difficult to secure borrowing facilities in the future.
While many people want to pay off their debts and reduce their liabilities, it can be tricky to know what approach to take.
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That’s why, what’s the best way to pay off debt, is one of the most common questions people have about their finances.
Fortunately, reducing your debts doesn’t have to be difficult.
With personalised debt advice, you can access the support and guidance you need to minimise your debts and secure financial freedom.
Although it’s easy to ignore mounting debts, facing them head on will help you tackle the situation effectively and access the help you need.
Repayment Strategies: Snowball vs Avalanche
Repaying your debts is essential but how you repay them could help you to reduce your debts more quickly.
Both the snowball and avalanche repayment strategies follow the same principle:
You make minimum payments on all of your debts but identify one outstanding debt to target first.
Any extra money you have goes towards making extra repayments on this debt, which will enable you to pay it off more quickly.
However, the snowball and avalanche methods differ when it comes to determining which debt you should give special attention to.
The Snowball Method
According to the snowball method, you make minimum payments on all of your outstanding debt and give extra attention to debt with the lowest outstanding amount.
Once that debt is paid off, you redirect this attention to the next smallest debt and so on.
By targeting the smallest debt first, you can reduce the number of outstanding debts you have more quickly.
Over time, an increasing number of debts are paid off and the size of the snowball increases as you gain momentum.
The Avalanche Method
In contrast, the avalanche method requires you to pay special attention to the debt with the highest interest rate.
By checking your current contracts, you can see exactly what interest rates you’re paying on all of your debts.
If you want to use the avalanche method to pay off your debts, make minimum payments on all of them and direct any extra cash towards the one with the highest interest rate, even if it’s got a low outstanding balance.
Snowball vs Avalanche: Which is better?
When asking, what is the best way to pay off debt, there’s no one universal answer that’s right for everybody.
While some people prefer the snowball method, others maintain that the avalanche approach makes better financial sense.
In general, you’re likely to spend less on interest overall if you use the avalanche method.
By targeting the debt with the highest rate of interest first, you can reduce the amount of interest you pay.
However, this will depend on the number of debts you have outstanding and the interest rates you’re paying.
If you have a lot of credit card debt, for example, you could be paying interest rates of 20-30% on outstanding balances, whereas a mortgage interest rate could be closer to 5-6% based on the benchmark 0.25% rate issued by the Bank of Canada.
For some people, the satisfaction of paying off a debt relatively quickly using the snowball method gives them the confidence and motivation to keep moving forward with their repayment strategy.
The satisfaction in clearing one debt can give you the impetus you need to persevere, even though you might spend a little more in interest repayments overall.
Get Tailored Debt Advice
As everyone’s financial situation is different, getting bespoke advice can be the best way to determine how best to repay your debts.
While both the snowball and avalanche repayment strategies are great ways to resolve financial issues, the best method for you will depend on your own financial circumstances and your personal preference.
Fortunately, accessing personalized debt advice is easier than you think.
At Bankruptcy Canada, we have over 20 years’ experience and have helped over 100,000 people resolve their financial problems.
To find out more or to talk to someone in confidence about your outstanding debts, contact us today on (877) 879-4770.
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