Debt Repayment: Which is a better repayment strategy- Snowball or Avalanche?

Debt can be a major burden and could hinder one's growth. Therefore, in order to achieve financial freedom, it is crucial to choose a proper and effective way to repay all pending debts whether it's a small credit card loan or a huge home loan. Repayment of debts helps to improve credit score and open up the options of new investments.

Here are two popular debt repayment strategies that most of the financial experts suggest— the Snowball method and the Avalanche method. Knowing details about both the strategies will assist you in deciding which approach will suit your financial needs the best.

What is the Snowball method?

The Snowball method of debt repayment focuses on several small milestones that lead to a smooth accomplishment of the goal. Under this strategy, you can pay off the smallest debt balance first regardless of the interest rate and then move on to the other debts. This method works on the psychological satisfaction of small wins (repayments) and encourages you to keep moving forward. The key benefits of this debt repayment strategy are motivation to repay debts and quick reduction in debt burden.

What is the Avalanche Method?

Under the Avalanche strategy, experts suggest a more calculated approach by prioritising the repayment of debts based on the interest rates. So, one needs to pay off the debt with the highest interest first, regardless of the balance. Therefore, you'll pay off the higher interests way earlier and can have significant savings in the long run. The Avalanche method helps you to save on higher interest amounts and it could be a long term strategy. As you clear the loans with higher interest on priority you may be left with more money to invest or repay the small debts.

Pros and cons of Snowball and Avalanche strategies

Snowball Method Pros

●     Provides a quick sense of achievement and motivation.

●     Enables a psychological boost from paying off smaller debts early.

●     It is effective for those who value visible progress.

Snowball Method Cons

●     It may not result in the maximum interest savings.

●     Smaller debts with lower interest rates may be prioritised, which could deter from making efficient interest savings.

Avalanche Method Pros

●     Aids in maximising interest savings in the long run.

●     The method works on a strategic approach based on interest rates.

●     It is ideal for individuals focused on long-term financial benefits.

Avalanche Method Cons

●     Results can be seen way later than the actual time of action.

●     Provides less immediate satisfaction compared to the Snowball method.