What is Debt Avalanche Method?

Full Definition

The debt avalanche method is a debt repayment strategy in which a borrower with multiple debts makes only the minimum required payment on every debt except the one carrying the highest interest rate, which receives any spare money available each month until it is cleared; the freed-up payment is then redirected to whichever remaining debt now has the highest interest rate, and the process repeats until all debts are cleared. Because interest is the cost of carrying a balance, targeting the highest-rate debt first -- regardless of how large or small that balance is -- minimises the total amount of interest paid over the full repayment period compared with any other order of repayment, making the debt avalanche the mathematically optimal strategy for someone focused purely on minimising total cost. Its main drawback compared with the alternative debt snowball method, which instead clears the smallest balance first, is psychological rather than financial: if the highest-interest debt also happens to be the largest, it can take a long time before the borrower clears any single debt in full, which some people find demotivating even though they are saving more in interest along the way. Because both approaches free up the same total minimum payments to redirect and differ only in the order debts are targeted, the practical choice between them often comes down to whether a borrower is more likely to stay motivated by quick wins (favouring the snowball) or is confident they will stick with a plan regardless of visible early progress (favouring the avalanche, which saves the most money overall).

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