Coming out of school, I graduated with a little over $64K in debt – ~$40K in private and ~24K in federal student loans. Adding to that, I said farewell to the car that got me through high school and college, Mabel, and took out a car loan, $19K. Yes, this 100% wasn’t the best financial choice; I got the worst rate because I didn’t have much credit, but I thought this was a “normal” part of life. I was commuting so I wanted a safer car and I went for it. Anyways, I made myself a bed with high payments and then I set out on a path to get out of it, but which path did I choose? Debt snowball or debt avalanche?
what is a debt snowball vs. debt avalanche?
To be candid, I didn’t google debt repayment strategies so the terminology wasn’t top of mind then, but I’ve learned the lingo as I’ve become more interested in personal finance. The basics are:
A debt snowball strategy is when you start with your smallest debts so that you are able to secure early wins and then as you pay off the smaller debts, you then “roll” those payments into your larger debts. This strategy provides you with early wins which can keep you engaged.
A debt avalanche strategy is when you start with the debt with the highest interest rates; this strategy can save you money and time.
Note that for both of these strategies you are still making your minimum payments across all debt, but you are putting any leftover funds to either your smallest debt or your highest interest rate debt.
When the “snowball” became more of an avalanche strategy
For me, I did a bit of a hybrid. When I graduated, I was hyper focused on paying off my private loans. At $40K, it was the largest debt I had and I wanted to get rid of it ASAP. Of course, ASAP means about 3 years. However, as I got the amount down, I realized my auto loan was the real killer because of the high interest rate, but I was very close to the finish line so I bought myself a win and paid off my private loan. It was important to me to mark one loan off my list and I knew once I did, I would have a real snowball/avalanche effect.
After that, I followed more of an avalanche strategy by rolling over my private student loan payment to the car – doubling my monthly payment – and then allocating any extra funds to the auto loan. As soon as I was able to carry over that monthly payment, that’s when the momentum began as I was making a dent in the principal. I was able to pay off the auto loan this past week, securing a big win just 8 months later.
I still have my federal student loans so I’m not totally in the clear yet, but I have a lot more comfort and confidence in my ability to get that loan amount down.
choose the path that leads to engagement and keeps interest rates in mind
My strategy wasn’t a clear avalanche or snowball, more of a hybrid and a mix of knowing when I needed to get a win to keep on the path of aggressive debt repayment so my recommendation is to do what feels right for you, keeping in mind interest rates, loan balances, and then also what you need to keep motivated.