Whether or not you’re ready, the time will come when you’ll have to pay back the student loan that got you through your post-secondary years. Additionally, you might have other debt, like a car loan or credit card that needs to be repaid too. It can be overwhelming but choosing the best method for paying down your debt can help to make it less stressful and more manageable. Check out the Snowball vs Avalanche methods for paying back your debt and see which one will work best for your situation.
Snowball method
The theory behind the snowball method is to pay the minimum monthly payment on all your debts and devote any remaining funds to the debt with the smallest balance. Once that debt is paid off, devote its previous monthly payment and any remaining funds to your next smallest debit. This method offers a “quick win” solution and is more likely to motivate you to stick to the repayment plan.
Avalanche method
The Avalanche method for paying debt, suggests making your minimum monthly payments on all your debts and devoting any remaining funds to the debt with the highest interest rate. As your debts are paid off, devote its previous monthly payment and leftover money to your next highest interest debt. This method will typically save you the most money in interest over the long run.
Here’s an example:
Imagine that you have the following debts and $500 extra to devote to debt repayment each month:
- $10,000 credit card debt at 18.99% with a monthly payment of $300
- $9,000 car loan at 3.00% with a monthly payment of $500
- $15,000 student loan at 4.50% with a monthly payment of $250
In this scenario the snowball method would have you pay off the car loan first, followed by the credit card then student loan, becoming debt-free in 24 months and paying a total of $37,018.
Alternately, the Avalanche method would have you pay off your credit card debt first, followed by your student loan then car loan. After 24 months you’ll be debt free, paying a total of $35,972. In this situation, the Avalanche method would save you $1046!
Although choosing a repayment method can help make paying your debt more manageable, keep in mind that simple lifestyle changes, budgeting and refinancing your debt to lower interest rates can help too!
If you’d like to discuss repayment options, give us a call at 1.866.863.6237.