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    What Is The Debt Avalanche Method And How Does It Work?

    A debt avalanche is an accelerated repayment plan that you can use to clear your debts. When you have saved a good amount of money toward debt repayment, you can use a major portion of the sum to clear the outstanding debt you hold with the highest interest rate

    The remaining amount can be made as minimum payment towards various other debts. This can be a better alternative to debt consolidation, where you have to combine different debts together and borrow a new loan to clear the existing ones.

    Through this approach, you can clear your debts with the highest interest rates first and do it continuously until all the debts are cleared.

    How Does It Work?

    When you opt for this method of handling debt, you must set aside a fixed amount towards debt repayments. This amount should be independent of your minimum monthly living expenses.

    Consider a scenario where you have allocated $600 towards debt repayments per month after your fixed living costs (including car). Let us assume that your current loan scenario is something like:

    • $1,200 on a credit card with a 15% annual percentage rate (APR)
    • $4,000 line of credit (LOC) with a 6% interest rate
    • $1000 monthly car payment at a 5% interest rate

    Additionally, we assume that you have a minimum monthly debt repayment of $100 for credit card and LOC. Your car loan would be a fixed monthly installment with the above minimum payment. 

    In this scenario, you will have to keep aside $200 ($100x2) for minimum monthly repayments. Doing so will leave you with $400 that you can use to repay the debt with the highest interest rate. 

    This month you will pay $500 towards your credit card debt as this has the highest annual percentage rate. If you do not add any additional charges, you can clear the entire debt in 3-4 months. Your extra funds can then be utilized for the loan with the next highest interest rate and so on.

    Pros Of Debt Avalanche

    If you have a solid plan to get rid of your debts, you can minimize the interest amount that you would otherwise allocate towards repayments. 

    An avalanche debt payoff method will decrease the time you require to get out of debt given lower interest is accumulated due to consistent payments. Usually, credit card debts accumulate higher interest over a period of time due to compound interest rates used by lenders. 

    Higher compounding periods lead to higher interest rates. Credit cards usually have compound interest on a daily basis. For other loans, the frequency would usually be monthly, half-yearly, or yearly.

    Cons Of Debt Avalanche

    The debt avalanche method requires a lot of dedication and discipline to get debt-free at the earliest opportunity. If you cannot commit and remain disciplined, it is best to avoid it.

    Another clear disadvantage of the avalanche debt payoff method is the potential emergence of unforeseen expenses. In such a scenario, there is a possibility that the borrower will not be able to make minimum monthly payments towards debts. 

    It is best to accumulate an emergency fund that combines savings of at least six months before opting for this method.

    Is It For Me?

    The avalanche debt payoff method is not for everyone as it requires a lot of discipline towards debt repayments month after month. 

    If you decide to opt for this method, you must have enough money for minimum monthly expenses besides an emergency fund, with savings of a minimum of approximately six months. 

    If you are committed, the avalanche debt payoff method can be the easiest way to go debt-free in the shortest time.

    Debt Avalanche Vs Debt Snowball

    The debt snowball is another accelerated debt payoff plan, but there is a difference between the two. A debt snowball method is completely opposite to an avalanche method.

    In a debt snowball method, borrowers use extra funds to clear their debts beginning with the lowest interest rates before progressing towards the debts accruing the highest rates. 

    It will cost more due to accrued interest over a period of time but there is a silver lining. The snowball debt payoff method gives borrowers the psychological motivation to clear off some debts, even if they are smaller.

    Conclusion

    If you are committed and disciplined towards clearing your debts, the avalanche method might be a good fit for you. 

    Once you define your minimum monthly expenses, you can plan for setting aside extra funds to clear your debts with the highest interest rates first. The avalanche debt payoff method will help you prevent spending even more money on your debts as interest would not accumulate as much.