When multiple loan payments come in at once, deciding where to start can seem confusing. Should you pay the smallest bill or take on the debt that charges the most interest?
The two repayment methods give different answers. The debt avalanche is aimed at reducing interest costs. The debt snowball focuses on quick wins that motivate you to keep going.
Both start with the same rule: make the required payment on each debt. Then use any extra money to pay off one debt faster.
Let’s say you have two debts. You should ₹Loan 10,000 at 12% per annum. You should also ₹40,000 on a credit card that charges 36% interest.
You have already made the required monthly payments for both. After covering your household expenses, you have one more ₹Possible repayment of 5000.
Where is it extra ₹Will 5000 work? These methods will help you make that choice.
Debt Avalanche: Pay Off Expensive Debt First
With an avalanche you bet extra ₹5000 per card. His interest rate is higher even though his balance is larger. Why does this help? Think that ₹5000 costs you interest.
At 36% per annum, ₹5000 is approximately ₹150 percent within one month. At 12% the same amount attracts approximately ₹50.
Note. These simplified figures assume monthly interest equals the annual rate divided by 12. Actual lender calculations may vary.
Reducing the card balance by ₹So 5000 will save more interest next month. The difference is approximately ₹100, assuming that the amount would otherwise remain unpaid for the month.
Continue transferring additional money to the card until it is cleared. Then focus on another loan.
Avalanche typically saves more in interest if your repayment budget stays the same. It suits people who are excited about cost reduction and can wait for results.
Debt Snowball: Pay off a small debt first
With snow extra ₹5000 goes towards a smaller loan. Against ₹The balance is 10,000, this payment removes half of the amount owed.
Additional interest may still apply, so another ₹5000 may not close it completely. However, paying off this smaller debt is closer than paying off the debt. ₹Card balance 40,000.
Let’s assume you cleared ₹Loan 10,000 repayable twice a month. ₹5000 each. Assume that each repayment occurs at the beginning of the month, with interest paid separately.
Choosing this loan instead of a more expensive card increases approx. ₹100 percent in the first month. In the second month, the additional interest will increase to approximately ₹200.
You pay approx. ₹Another 300 percent in two months by choosing snowball. However, once you complete a smaller loan, you may be asked to continue.
Once the smaller loan runs out, transfer your previous payments to the card. Add extra money for repayment.
Seeing one debt disappear may make the remaining task seem less daunting. This approach may be suitable for those who need visible progress to stay motivated.
The downside is that the expensive card gets extra attention later. This delay could mean paying more interest overall.
Which approach suits your habits?
Choose Debt Avalanche if the interest savings keep you committed. Choose Debt Snowball if clearing out small balances will help you keep going when repayments seem tedious.
None of these methods justify not making necessary payments on your other debts. Both depend on investing more money to pay off debt.
Before making a choice, check whether additional loan payments will incur additional costs. Also, decide how much you can afford without neglecting the necessary expenses.
No one should be impressed by your choice. This should help you keep paying, month after month. The cheapest plan only works if you follow it. Quick wins only help if they help you pay off your debt further.
