Debt repayment for some people is a never-ending process with a new liability now and then. You must have a plan to manage different expenses while keeping up with the repayment. There are no shortcuts to it; however, some methods can simply the whole process.
Debt avalanche and snowball are two popular repayment strategies with a huge difference at the core. One strategy put the focus on high-interest payment while the other repay the smaller debts first. Here, we have mentioned the use and implementation of debt avalanche and snowball methods for loan repayment.
Debt Avalanche Method
The debt avalanche method suggests the borrowers repay the high-interest loans before the other liabilities. You need to make a maximum payment on these loans until they are paid off. The other debts can wait with the minimum payment to avoid negative markers on credit history.
You can move down to low-interest debts once the list-toppers are repaid. It is ideal when the repayment for the costliest loans takes only months or a year. If not, you might lose motivation, or the excess payment could be overwhelming for a long duration.
Advantages of Debt Avalanche
The major advantage of debt avalanche is cost-saving because heavy-interest loans are repaid early. Less tenure means less interest paid for a loan, reducing the overall cost significantly. The loans with manageable interest rates are left in the end.
You are debt-free earlier than the original terms of the different debts. The repayment is faster because of the aggressive approach. Each time some extra payment is made, the end of terms comes a little closer.
How to Use the Debt Avalanche?
Start with creating a budget for the debt repayment. You need to find the maximum cash you can use for repayment after calculating the different expenses. The money should always be higher than the total monthly installments for all the liabilities.
Now, it is time to create a list of debts and sort them by interest rates. They should be arranged in descending order where the highest interest rates should be at the top. Do not consider the loan amount or duration while prioritizing the loans.
Make minimum payments for the loans except the first on the list. For it, you need to pay the remaining amount for the repayment budget. Again, the budget should always be greater than the total minimum repayment amount to make the debt avalanche work.
The debt snowball method targets the small debts with the repayment instead of the ones with high interest. You are snowballing towards the larger debts after paying the smaller debts. The cycle ends with the biggest debt on the list.
The remaining loan amount is the only thing considered with this method. However, it creates momentum for the debt repayment that helps in the long run.
Benefits of Snowball
It is easy to lose motivation with the avalanche method when the repayment for a loan lasts for years. The Snowball method keeps morale high with small wins over time. With every repayment, you can feel the relief from the stress of debts.
The repayments are easy to manage because of reduced repayments. You have one less payment to remember; thus, reducing the chances of missed payments. The credit history will also improve over time.
Another hidden benefit is the opened line of credit after each repayment. Some lenders count the number of liabilities and credit history before approving the loan application. At the same time, others offer loans such as car finance in Ireland with bad credit regardless of the previous liabilities.
How to Use Debt Snowball?
The process to implement debt snowfall for repayment is similar to the debt avalanche. You must start with the budget and amount allocation for the repayment. Again, it should be higher than the total of the minimum payments for each loan.
Now, create a list of debts and this time sort them based on the loan amount. Consider the amount left for repayment, not the total amount of the loan. Arrange them in ascending order to find the loans to target.
Pay the maximum amount possible to the first loan in the list. Once it has been paid off, you can shift the focus to the next one in the list. Make sure no payment is missed for the remaining debts to prevent any default on the credit history.
Debt Avalanche or Debt Snowball
The debt avalanche is a method that saves money over time because less interest is paid. However, the only drawback is the lengthy repayment of some loans that can make you lose motivation. It is recommended if you are committed towards repayment, or the loan terms aren’t too long.
The debt snowball is not the best solution to save money on interest rates. However, it increases the repayment speed with small milestones. You are more likely to complete the repayment with debt snowball because of the small achievements over time.