Debt
What is the difference between the debt avalanche and the debt snowball? Why would a person choose one option over another? Why would a person choose either option?
What is the difference between the debt avalanche and the debt snowball? Why would a person choose one option over another? Why would a person choose either option?
The debt avalanche identifies your debts by interest rate. You place the highest rate on top and the next lowest after that until you get to the bottom. At that point, you make minimum payments on every loan except the top loan with the highest interest rate. You take all your extra money and pay that top loan off as fast as you can and when that is paid off, you do the same with the next highest interest rate loan. Continue until all loans are paid off.
The debt snowball uses places the loans in order based on the size of the loan. The smallest loan is on top and then you go in order downward with the largest loan on the bottom. You would then make the minimum payment on all loans except the the smallest loan at the top and that is again where you would take all extra money and pay that off as fast as you can.
A person would select the debt avalanche because financially, it is the smartest approach. Paying off a 16% loan fast will improve your financial situation better than paying off a 4% loan for example. The key is to stick with the program through thick and thin. Know thyself!
A person would select the debt snowball because of the psychological affect of paying off a loan. It will be easier to pay off a small loan faster than a big loan and for many people this feels good and might very well help you sustain the program of paying off your debts. Know thyself!
Both options would be chosen because a person wants to get out from under the burden of debt. It can be stressful and difficult to have a great deal of debt in one’s life. These two approaches deal with the issue once the individual commits their mind and behaviors to accomplishing it.
I have never heard of these terms before. I’m glad that I came across this question. Thanks for the enlightenment.
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