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Debt Avalanche

There are the two most famous types of accelerated debt payoff plans – Debt Avalanche and Debt Snowball. In debt avalanche, once the debt with highest interest rates or Annual Percentage Rates are paid off and the leftover money is spent on the next highest interest-bearing loan. This process keeps on continuing until all your loans have been paid off.

How The Debt Avalanche Method Can Be Used?

To begin with the debt avalanche method, you first need to review all your loans and find out how much cash you can allow for paying off your debts. Then, make a list of all your loan balances and arrange them in descending order based on their interest rates. Follow that list for repaying all your loans every month.

Debt Avalanche Vs Debt Snowball

The Debt Snowball is the same as that of debt avalanche. The only difference is that when you are preparing the list of all your loan balances, you just need to arrange them in ascending order. This implies that, in debt snowball, at first, the debtor pays back the loan that has the lowest interest rates and the excess money is used to pay off the next low-interest-rate-bearing-loan.

Which method is better?

As per the experts, debt avalanche is a costlier one and the debtors find debt snowball to be more motivating. This is because debtors are able to eliminate the small debts first and they are left with a few large debts, which keeps them motivated.

References:

1. Investopedia https://www.investopedia.com/terms/d/debt-avalanche.asp

2. Nerdwallet https://www.nerdwallet.com/blog/finance/what-is-a-debt-avalanche/

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