What's the Debt Avalanche method?

Wednesday, March 22nd

What's the Debt Avalanche Method?

You may have heard the term "Debt Avalanche" when looking at ways to pay off your loans. What is the Debt Avalanche, and how does it work?

Debt Avalanche Explained

When you take a look at your loans, you'll see that they all charge different interest rates. Credit cards, for example, are notorious for charging high interest rates - some even charge 20% or more!

Loans with higher interest rates charge you more for the money that you've borrowed. Wouldn't it be great to pay off those more expensive loans first, and save that money?

That's the idea

That's the idea behind the Debt Avalanche. With this method, you make the minimum payment on all your loans, but put anything extra that you have into the payment on the loan with the highest interest rate.

Once that loan is paid off, congratulations! You're one step closer to being loan-free. Then, take the money that you were paying on that loan, and add it to your monthly payment on the loan with the next highest interest rate.

That's why they call this the "Debt Avalanche". The money that you save by paying off the most expensive loans first, gets added into the payment on your next loan.

You would pay the minimum on the furniture store's card, because they're not charging you any fees for the money you've borrowed. Then, you would put your extra cash into the payment for the other credit card, since they're charging you a lot of money each month.

Once your high interest credit card is paid off, you take the amount you were paying on it, and add it to the minimum payment you've been making on the furniture store's credit card.

Another approach

Undoubtedly, the Debt Avalanche is a smart way to pay off your loans. Many people have used this approach with great success. But sometimes, the amount of loans a person has can be intimidating, and they may lose their motivation if they don't feel that enough progress is being made. Antoher approach that may people choose is debt consolidation.

Put simply, with debt consolidation, a single loan is made to you, which pays off all your other loans. Then, you just make a single payment to that new loan each month.

Why would you get a consolidated loan?

There are several reasons why you may want a consolidated loan.

• First, you can usually save money over the life of your loan. This is because a consolidated loan's interest rate can be much less that the interest rate charged by the credit card companies you currently pay.
• Second, you can usually pay off your loans much faster than if you were to continue paying the minimum monthly payments and miscellaneous penalty fees on your current loans. This is because, with a lower interest rate on a consolidated loan, more of your money goes to paying off your loan rather than into the pockets of the lender.
• Third, you reduce the number of payments you make each month. No more scrambling to make sure every card is paid; instead, you have just one single, simple loan payment to make.

Whether you try to tackle your loans on your own, or use the free advice from a reputable debt consolidation company, the important thing is to start your journey toward a loan-free life. After all, the sooner you start, the sooner you'll arrive.