How to pay off debt using the avalanche method

17 AUGUST 2023

The avalanche method can help you pay off debt faster. In this article, we will explain how you can use this method to become debt free as soon as possible.Woman with sunglasses on, smiling at the beachThe debt avalanche method is a way for paying off debt. It entails focusing on paying off your debt with the highest interest rate first, then the loan with the next highest interest rate, and so forth. With this approach, you might be able to escape a debt snowball and lower expensive interest payments.

So how does it work?

When you employ the debt avalanche technique, you prioritise paying off your debt with the highest interest rate before any other loan. You make that debt your top priority while continuing to pay at least the required minimum on your other debts each month. Any additional funds that you have, are allocated to your highest-interest debt.

Get started in 3 steps

  1. Sort your debt from highest interest to lowest
  2. Establish a budget: Determine how much extra money you have to put toward paying off the loan with the highest interest rate on your list by keeping track of your income and expenses in addition to your monthly debt payments.
  3. Rinse and repeat: After paying off the loan with the highest interest rate, move on to the debt with the next-highest rate. To fast track this process, you can direct the money you used to pay on the highest interest rate loan to the next one, including the amount you were already paying. Maintain this strategy until all of your debts have been paid off.

Pros and cons of a debt avalanche

The debt avalanche technique could help you stay motivated because you're paying off the most expensive, highest-interest debt first. Because you'll pay less interest overall, the debt avalanche may offer a quicker path to debt freedom than alternative payback plans.

The debt avalanche is a method of debt relief that is acknowledged to be mathematically more effective than other debt reduction strategies in terms of efficiency, cost, and speed. However, it could also feel discouraging if the debt with the greatest interest rate is also the highest owed. If that's the case, it can take some time before you start to see results, and sticking with the plan might be difficult.

More considerations

The sooner you can pay off your debts, the more disposable income you’ll have. List all of your expenses, giving fixed bills like rent, groceries, and electricity priority, then subtract the sum from your monthly income to get your discretionary income. Your income must cover a variety of expenses if you wish to take on the debt avalanche strategy. These include covering your basic living needs, making the minimum payment on each obligation already owed, and having funds available to start the payback process.

You might also think about generating additional income to accelerate your schedule. By doing this, you also stop the growth of your existing debts due to interest.

Is it for you?

The debt relief strategy that works best for you is the one you'll stick with until your debt is completely gone or at least under control, whether you decide to use the debt avalanche approach or another type of debt reduction. The debt avalanche strategy is beneficial for some people since it saves you more money in the long-term. We can’t, however, always control which debts need to be paid off as a priority, in which case debt consolidation may be a more viable solution. Compare your options before selecting the debt relief strategy that best suits your needs.