What does all this ice have to do with paying off debt? Let’s take a look at debt snowball versus debt avalanche when eliminating student loans so you can figure out which works best for you.
Debt snowball method
The debt snowball method aims to start with small wins and build momentum over time. Using this method, you start paying off your student loans with the smallest balance first, while paying the minimum on the rest.
Let’s say you have three student loans with balances of $15,632, $8,941 and $1,685. Using the snowball method, you would:
- Focus on paying off the $1,685 balance, throwing as much money as possible toward this loan.
- Pay the minimum on your $8,941 loan.
- Pay the minimum on your $15,632 loan.
It’s important to stay in good standing with all your loans, but the goal is to prioritize the smallest balance and work up to the higher balances. In this case, after paying off the $1,685 loan, you’d then focus on the $8,941 loan before the $15,632 loan.
The upside is it helps you see results right away and get a boost of motivation. The major downside is that it often takes longer to eliminate all your debt using debt snowball versus avalanche.
Here’s a closer look at the pros and cons of the debt snowball method:
- Starting with the smallest payments first can provide quick wins and a sense of accomplishment.
- It’s a tried-and-true method to pay off debt.
- As you eliminate your smaller balances, you can free up extra funds to focus on the next balance.
- It may take longer to pay off your debt.
- You could pay more in interest over time.
The debt snowball method is a good choice if you’re dealing with some hardcore debt fatigue and need a boost of motivation. If you go this route, know that you’ll probably pay more in interest since you’re focusing on the smallest balance first rather than the interest rate.
When debt snowball works best
If you have many different types of debt, debt snowball works best with paying off smaller amounts. Think about store credit cards, small loans or when you’ve borrowed money from friends and family.
In one Harvard Business Review study, participants that focus on the smallest balance first admit to feeling like they’re progressing more compared with other methods.
Debt avalanche method
The debt avalanche method requires you pay down the loan with the highest interest rate first while paying the minimum balance on the rest of your loans.
So if you have loans at 7.9%, 6.5% and 4.0%, you would work on eliminating your loan with the 7.9% interest rate first, regardless of the balance. Once you’ve paid it off, you’ll then focus on the 6.5% loan before the 4.0% loan.
Here are the pros — and a con — of using the debt avalanche method.
- You save more on interest over the life of the loan.
- You’ll pay off your loans faster.
- You may not see wins as fast as you would with debt snowball, which can hurt your motivation.
When debt avalanche works best
If you have many different kinds of the same debt, such as student loans, debt avalanche might be best for you. Having many different student loans with varying interest rates can be hard to constantly track. Paying the minimum balance every month may not be making a sizeable dent in your payoff plan.
Instead, continue making payments on all your student loans while paying as much as possible to the loan with the highest interest. Then devote that extra cash to the loan with the next-highest interest rate.
Debt snowball vs. debt avalanche: Which one is best?
When looking at debt snowball versus avalanche, both methods will get you to the same destination — a debt-free life.
Choosing the right strategy for you depends on your goals and how you’re motivated. Determine the type of saver and spender you are with some questions:
- Do little wins push you to keep going?
- Do you have the patience to pay off higher-interest debt to save more in the long run?
Knowing how much you could save can influence your answer. You can use an online calculator like this one from MagnifyMoney, which, like Student Loan Hero, is owned by LendingTree — that compares both methods to determine how much you will pay back and how long it will take to get out of debt.
Depending on your interest rates and balances, you could stand to save money and shave off time from your repayment period by using the debt avalanche method.
But if you have a hard time paying off debt or won’t save a significant chunk of dough, debt snowball may be a good option for you.
Also, you don’t have to choose between one or the other — sometimes a combination of the methods is most effective.
There are no right or wrong answers when it comes to debt repayment. Whether you choose debt snowball, debt avalanche, some hybrid method or something completely unique, the key is that you’re consistent and that you have a plan to get out of debt.
Melanie Lockert contributed to this article.
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 10, 2020.
5 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.16% effective August 10, 2020.