When I was paying off my debt, it was pretty simple. I had seven student loan accounts, all with interest rates within the same percentage point. So I read up on a few different payment methods, but with the nature of my debt, the choice wouldn’t have made much of a difference. That’s not true for everyone– debt, for many people, can take the form of tens of accounts with huge varieties of dollar amounts, interest rates, servicers, and account types.
No matter where you’re at, knowing the different types of repayment strategies is crucial for creating your own personal debt freedom game plan. So in this post, I’m going over the 3 main debt repayment methods: The debt snowball, the debt avalanche, and the debt lasso method. I won’t make the blanket statement that there is one best method, because the best method will be the one that fits each person’s personality, goals, and the nature of their debt.
In the debt snowball method, you do something that’s mathematically counterintuitive but psychologically helpful: as you meet the minimums on all of your debts, you focus all your energy and extra money on paying off your smallest debt first, then the next smallest, and so on and so forth until you are completely out of debt.
Once one debt is paid off, all of the money spent paying it off can go towards your next biggest debt in addition to the minimums. The reason this doesn’t make mathematical sense is that this method ignores interest rates. So, you might be accruing more and more debt on a larger debt, but you focus on paying off the smaller one first. By then end of this method, you could very well end up paying more money in interest than if you were to use another method.
So, why would anyone use a method that might cost them more? The answer is that the debt snowball method can often be psychologically much more motivating. When you break up your progress into small wins and start crossing debts off your list as you pay them off, it’s extremely encouraging on your journey and helps to create a lot of momentum.
This method is great for:
- People who think they might get off track in their debt free journey.
- People who are in need of making some money wins.
- People who have a lot of small debts versus 1-2 larger debts, because it will provide a ton of momentum.
- People whose debts all have similar interest rates, because you can get all the motivation benefits without the mathematical expenses.
This method, on the other hand, is mathematically sound, but could potentially be less motivating than the snowball method depending on your situation. In the debt avalanche method, you similarly make the minimum payments on all your debts, but you focus all of your energy and extra money on the debt with the highest interest rate, and so on and so forth, ignoring the size of the debt.
Not only will this save you more money, but if you’re able to stay on track, it will get you out of debt faster than the snowball method. It’s true that you may not have as many immediate wins, but the avalanche method can still be highly motivating. While small wins and progress points are motivating for some, you might actually be more encouraged to pay off your debt if you’re realistic about the monetary costs of it as well as the shortened timeline you can have with this method. It’s not that the avalanche method is necessarily less motivating, but it fits better for a different type of person.
This method is great for:
- People who tend to be more motivated by avoiding interest than making small wins along the journey.
- People who are confident in their ability to stay the course during their debt free journey and not give up if they run into obstacles.
- People who have a wide range of interest rates on their various debts.
This method is all about lowering your interest rates as much as possible. As you pay the minimums on your debt and put extra money toward your debt with the highest interest rate (as the avalanche method would have you do), you contact your providers to get the lowest interest rate possible. In addition, when possible, you transfer balances to cards or loans with 0% interest.
Now, the trick with the 0% offers, is that they often run out after a certain amount of time, usually after a year– then interest rates skyrocket. So, you should be confident that you can pay off that debt within the allotted time. Alternatively, you can shop for a new 0% offer.
This method is great for:
- People who have a strong understanding of credit and are willing to read and follow the fine print.
- People who are highly organized and willing to stick to their plan in order to get out of debt as quickly and cheaply as possible.
As you can tell by reading these, it’s possible to do some combination of the lasso method with either of the other two methods, and that’s what I would encourage most people to do. Learning to get comfortable negotiating interest rates and learning the ins-and-out of the credit system are highly useful skills. But ultimately, the debt repayment method that you will stick to is the best one.
Debt repayment should be one part of a larger financial plan (AKA a budget). Get my free budget templates here.
Don’t forget that I made a resource for working on your money mindset as you walk through this journey.