Which Debt Repayment Strategy is Right for You?

by | Dec 14, 2021 | Blog

Paying off debt is a major financial accomplishment, but doing so will require having patience, and of course, a debt repayment plan.

Most people have to take on some kind of debt to pay for things like college, a home purchase and buying a car. These things are essential now-a-days. So taking on debt, is, in most cases, inevitable these days.

There is no shame in financing important areas of your life. But going into these financial responsibilities with eyes wide open is also important.

The end of 2021 will soon be here. Now is a good time to look back and see how your debt repayment plan went over the last 12 months. If it didn’t go according to plan, what stopped you from following it? If it did go according to plan, can you plan on paying more down next year?

Federal student loan payments are also set to resume in 2022. If you haven’t been making payments while your loans have been in forbearance, now is a good time to log back in and see what the minimum payments are. You might need to save more in January in order to be able to make those payments again. Check out another recent blog post if you need to get a better grip on managing your cash flow!

With all of this in mind, we wanted to take the time and go over two of the most common strategies for debt repayment.

Which Debt Repayment Strategy is Best for You?

Avalanche Debt Repayment Strategy

An avalanche debt repayment strategy is a slow-but-steady way to pay off your debt. You set aside a debt repayment amount every month, make the minimum payments on all your debts and then use the leftover money to pay off your higher-interest debt as quickly as possible.

For example, let’s say you have $5,000/month to devote to paying off debt and you have the following debts:

  • $12,000 of credit card debt with a 19% APR.
  • An $8,000 car loan with a 4% APR.
  • $15,000 in student loans with a 3% APR.

With the avalanche repayment method, you would make the minimum payments on the car loan and the student loans and use the rest of the earmarked funds to pay off the credit card debt as soon as possible because it has the highest APR. 

With this method, you can potentially save on interest because you are paying off the most expensive loans first. 

Snowball Debt Repayment Strategy

A snowball debt repayment tackles one debt at a time, starting with the smallest loan so you can get it off your plate sooner. In the above scenario, you would pay off the car loan first since you owe the smallest amount, then tackle the rest of the debt. 

This strategy may seem appealing for individuals who want to see the results of their actions sooner, but you may end up paying more in interest because you may have the high-interest loans for longer. 

Both avalanche and snowball debt repayment options are great ways to encourage people to pay off debt, and they both have their pros and cons. The strategy that’s right for you will depend on your own unique financial situation, your loans, and your personality and motivations. 

Whether you use the avalanche or snowball debt repayment method (or a mix of the two), paying off debt is a healthy and responsible financial strategy. And having a debt repayment strategy in place will help you avoid letting debt spiral out of control. It is up to the individual to decide which debt repayment strategy is best for their particular situation.

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