Avalanche Method

Full definition

The avalanche method is a systematic debt payoff approach that minimizes the total interest you pay over time by targeting high-interest debt first. How it works: List all debts with their balances, minimum payments, and interest rates. Pay the minimum on every debt each month. Apply all remaining available money to the debt with the highest APR. When that debt is paid off, roll its payment to the next-highest-rate debt. Example: Credit card at 24% APR ($5,000 balance), personal loan at 14% APR ($8,000 balance), auto loan at 6% APR ($12,000 balance). Avalanche order: credit card first, then personal loan, then auto loan. You pay the absolute minimum on the personal loan and auto loan while aggressively paying the credit card. Why it saves the most money: High-interest debt grows fastest. Every extra dollar you put toward a 24% APR debt saves 24 cents per year in perpetuity (until the balance is zero). A dollar toward a 6% debt saves only 6 cents. Hitting the highest rate first is mathematically superior. Comparing to snowball method: The snowball method (pay lowest balance first) gives psychological wins faster by eliminating accounts quickly. Research shows some people stay more motivated with snowball because they see accounts closing. Avalanche wins on pure math; snowball wins on psychology for some borrowers. Using avalanche with a personal loan: If you take a personal loan to consolidate credit card debt, the personal loan replaces high-APR debt with lower-APR debt automatically - essentially performing the avalanche move in one step.

• Debt consolidation
• Prepayment penalty
• Personal loan
• Credit counseling