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The debt avalanche method: What it is and how it works

If you’re looking for ways to clear your outstanding debt, you may have come across the ‘debt avalanche method’. Here at Lowell, we know just how important it is to understand your options to make an informed decision, especially when it comes to figuring out the best way for you to pay off your debt and manage your finances.

In this guide, we’ll be discussing the debt avalanche method, breaking down what it is and how it works into simple terms, as well as going over the advantages and disadvantages that could come with this strategy.

This content is intended to be an impartial guide about the debt avalanche method. Lowell Financial Ltd does not offer financial advice. You can find out more about the organisations you can contact in our guide on debt help and support.

What is the Debt Avalanche Method?

To put it simply, the debt avalanche method is a strategy used to pay off debts by focusing on those with the highest interest rates first. This is completely different to the debt snowball method, which we’ve also written a guide about, that focuses on clearing the smallest debt amount first regardless of interest rates.

It’s important to note that when you’re following the avalanche method of paying off debt, you still need to make minimum payments on all of your outstanding debt in order to avoid interest payments building up further or having your account default – you can find out more about what this means by reading our default guide.

Then, with this method, you put as much money as you can afford towards clearing the debt with the highest interest rate. Once that’s been fully paid off, you can then move onto paying off the next debt with the second highest interest rate and so on.

How does the Debt Avalanche Method work?

Below are the steps involved with putting the debt avalanche method into practice:

  1. Pull together a list of all of the debts that you owe, making sure to put them in order from the highest to lowest interest rate.
  2. Create a budget including living and household expenses to figure out how much you can afford to put towards your debt payments. We’ve got our own budget calculator tool which should be able to help you with this.
  3. Figure out how much you need to pay as a minimum amount per debt and make sure to factor that into your budget. If you’re concerned that your payment plan isn’t working for your situation, be sure to get in touch with your creditor to see if they can do anything to help.
  4. Any spare money that you can reasonably afford can be used to make larger monthly payments towards the highest-interest debt.
  5. After you’ve paid off the first debt on your list, you can then move on to the next one and follow the same steps.

How long does the Debt Avalanche Method take?

There’s no specific amount of time which it takes to clear all of your debts using the avalanche debt method. This is because it depends on your circumstances including how many outstanding debts you have, how much you owe per debt, the interest rates on each debt, and how much additional income you have available.

At Lowell, we understand that dealing with debt, particularly multiple debts, can be a long process and might leave you feeling stuck. That’s why we’ve written a separate guide about how to pay off debt fast which includes some ideas that you might find helpful.

The Debt Avalanche Method: an example

To put the debt avalanche method into context, here is an example of how this might work:

  • Your outstanding debts include £7,000 credit card debt at 24.6% annual percentage rate (APR); £10,000 car loan at a 7.1% APR; and £2,000 personal loan with a 12% interest rate.
  • You’ve paid off the minimum monthly amount for each debt and have £500 spare after necessary costs.
  • Given it’s got the highest APR/interest rate, you would put any extra money you can afford towards paying off a larger chunk of the credit card debt.
  • After that’s fully paid off, you’d then focus on paying as much as possible each month on the next-highest debt, which would be the personal loan.

APR vs interest rates

In short, interest rates are the fees involved with borrowing money. These are normally displayed as an annual or monthly percentage amount. It’s worth noting that the way interest is applied can vary depending on the type of borrowing – for example, a credit card vs a mortgage - which is why it’s important to check over the terms and conditions of your particular loan.

APR (Annual Percentage Rate) refers to the total cost of borrowing over the span of a year, which includes the interest rate and other standard fees. This is why APR is typically higher than the interest rate.

To find out more about interest rates and APR, and the difference between the two, MoneyHelper have a guide that goes into this topic further.

Advantages of the Debt Avalanche Method

  • Monthly repayments should start to decrease as you clear the debts with the highest interest rates which can be motivating.
  • Over time you’ll also have fewer creditors to pay, so it should become easier to handle your finances.
  • Following the avalanche debt method could mean you end up having to pay less interest in the long-term.
  • It should be a simple, structured method to follow as you focus on clearing the most to least expensive debts, based on interest rates.

Disadvantages of the Debt Avalanche Method

  • Compared to the debt snowball method, the avalanche debt method can take longer to see progress with, which may be frustrating to some people.
  • You’ll need to pay the minimum amount possible on all your outstanding debts and use any spare money to make larger payments towards the highest interest rate which means overall monthly debt payments could be quite high.
  • Similar to the debt snowball method, it’s not a formal arrangement, so you’ll need to hold yourself responsible.

Is the Debt Avalanche Method right for me?

When it comes to whether the debt avalanche method is right for you and will help you pay off your debts, it depends entirely on you and your situation.

To find out more about whether this method could work for you, you can reach out to trusted organisations like National Debtline and StepChange. They’ll be able to offer impartial expert guidance based on your individual circumstances and even explain other options that you might not have considered, such as the different kinds of debt solutions.

If you’ve got a debt with us and have any questions or concerns, please get in touch with us. Our customers are our top priority, and we want to make sure that we’re supporting you on your journey to becoming debt-free with Lowell. We understand that.

For more helpful guides on a range of financial and debt-related topics, be sure to check out our Debt Guidance Hub.

 

First published: 3rd December 2024