Debt Repayment Strategy

Repayment Essentials

Introduction

Chapter 1:
Manage Your Loans

Chapter 2:
Making Your Payments

Chapter 3:
Interest Rates for Student Loans Repayment

Chapter 4:
Customize Your Payment Terms

Chapter 5:
Help During Repayment

Chapter 6:
Questions About Repayment

Chapter 7:
Student Loan Financial Terms

Avalanche vs. Snowball

Getting a handle on your debt can seem daunting, but working your balance down to zero is possible – you just need a plan! Two popular approaches for tackling debt repayment are the Debt Avalanche and Debt Snowball methods.

Both schools of thought emphasize making the minimum payments on all of your debts each month, while aggressively paying down one balance at a time. The difference between the two is how each methods prioritizes which debt to pay off first.

Debt Snowball

The Debt Snowball approach focuses on paying off your smallest balance first and creating some positive momentum towards getting yourself out of debt.

Step 1	Sort your debts from the smallest amount owing to the largest.
Step 2	Make the minimum payment on all your debt, except for the smallest amount owing – put any/all extra payments that you can on this one.
Step 3	Continue until the smallest amount is paid off. Once that debt is gone, move onto the next smallest amount/debt owing.

Upside

The benefit of the Snowball method is the positive boost of a quick reward. Paying off that first debt
– SUCCESS! - gives you the motivation to tackle the next one.

Downside

You will pay more interest in the long run with Snowball method than you would using the Avalanche method.

Debt Avalanche

The Debt Avalanche involves focusing your attention on aggressively paying off the balances with the highest interest rate first.

Step 1	Check those interest rates. Arrange your debts in order of highest interest rate to lowest interest rate.
Step 2	Continue to make the minimum required payment on each of your debts, except for the one with the highest interest rate – on that one: pay as much extra as you can afford until it is paid off.
Step 3	Success is yours when you have paid off the debt with the highest interest rate! Repeat – Start back at Step 1 until all your debts are paid in full.

Upside

Getting rid of the debt with the largest interest rate first will save you money in the long run.

Downside

It can be tough to stay focused because the first debt you tackle may also be the hardest.

Which Method is Right for You?

Since both the Debt Snowball and Debt Avalanche strategies foster good repayment habits, it’s hard to say which one is better. While the Debt Avalanche approach may be the cheaper way to pay off outstanding balances, the Debt Snowball method can motivate you to keep working towards being debt free by tackling the smaller, 'easy' debts first.

Figuring out which method of tackling your debt is the most motivating to you is the first step in determining which method to use.

If saving money is your highest motivation then the avalanche approach is probably the right choice – but remember, you need to stay on track with your debt repayment plan.
If you need to see quick progress and build confidence in your loan repayment habits, the Debt Snowball approach may be the best way to help you stay on track.

Whichever one you choose, all that matters is that you stick to a plan and avoid falling behind on your repayment goals.