Paying Off High-Interest Debt: Choosing the Right Strategy

You don’t need to live on beans and rice. Just pick the approach that works best for you financially and psychologically.

Paying off high interest rate debt is a high priority. High interest debt will keep you from achieving better financial security. If you don’t know where to start, take a look at the avalanche and snowball methods below and decide which is most advantageous to you financially and psychologically.

We’ll be using the following example below to describe avalanche vs snowball repayment.

Current debt

• Auto loan: $10,000 at 8% interest
• Credit card: $2,500 at 28% interest
• Medical loan: $1,000 at 3% interest
• Personal loan: $15,000 at 10% interest

Total minimum monthly payment:
$700
Money after living expenses:
$900

---

Avalanche Method

The avalanche method of debt repayment prioritizes paying off your debts by order of descending interest rate. Pay the minimum monthly payment on each debt and use any remaining funds to further pay down high interest debt.

You would pay the minimum monthly payment due to each loan and then apply the remaining $200 to your highest interest debt. Your repayment priority would be:

1. Credit card: $2,500 at 28% interest
2. Personal loan: $15,000 at 10% interest
3. Auto loan: $10,000 at 8% interest
4. Medical loan: $1,000 at 3% interest

---

Snowball Method

The snowball method of debt repayment prioritizes paying off your debts in order of smallest to highest monetary amount. You would follow the minimum payment methodology and your remaining funds would go from the smallest to highest debt. Using the same scenario above your repayment priority would be:

1. Medical loan: $1,000 at 3% interest
2. Credit card: $2,500 at 28% interest
3. Auto loan: $10,000 at 8% interest
4. Personal loan: $15,000 at 10% interest

---

Choosing the Right Debt Repayment Method

The best debt repayment method isn’t just about math. It’s about what you’ll stick with. Here’s how the avalanche and snowball methods compare.

Repayment Method	Pros	Cons
Avalanche	You pay less interest in the long term since you focus on high interest rate debts.	It requires more discipline to use this method as debts may be paid off slower.
Snowball	Strong psychological motivation. Seeing debts paid off quickly is very encouraging.	You accumulate and pay more interest as your higher interest, possibly higher debt loans take longer to pay off.

---

Things to Look Out For

Paying more than the minimum monthly payment may require that you specify that the over-payment goes towards principal and not future payment. The former pays down your original debt amount while the latter counts towards future principal + interest. The former means you save money by paying less total interest while the latter means no savings.

The reality is that many of you may be saddled with student loan debt and are wondering why it was left off this page. Student loan debt is its own complicated beast with many different payment options such as PAYE, SAVE, IBR, ICR (and/or private student loans), and PSLF.