Getting an education, driving your new car off the lot, buying a home: pretty much every big life step comes with a “frenemy” called debt. First, debt helps you reach your goals and get the things you need, so you can have the life you want.
Then you have to pay it back over a long period of time, often with a mix of financial anxiety and chest pains. But debt repayment doesn’t have to be so stressful—sometimes it can even be empowering. It all depends on how you think about it.
If you’re like a lot of folks, you may have a mix of shorter-term debts, like credit card payments, and longer-term debts, like student loans and a mortgage. Just making all the different monthly payments can be a chore that takes hours off your life, not to mention a big chunk of your paycheck. And if you’re just making the minimum monthly payments, it might seem like you’ll be repaying your debts forever.
Choosing a debt payoff strategy can ease your mind—and maybe even your wallet. A successful debt payoff strategy is one that helps you feel empowered and in charge of your finances, while keeping you motivated to get out of debt as soon as possible.
This guide will take you through some of the most popular payoff methods, like the snowball, avalanche, and snowflake strategies, as well as the loan consolidation strategy. Each option has its pros and cons; Choosing the right strategy comes down to what’s going to inspire you to get debt-free.
One quick thing: these are just overviews of how possible debt payoff strategies might work—not advice. The only person who will know which (if any) are right for you and your unique financial situation is you—or your financial advisor. With all that said, let’s dive in!
The Debt Snowball Method
The first of these snow-themed repayment methods is the snowball method. Popularized by financial self-help guru
Dave Ramsey , the concept behind this method is that paying off your smallest debt first (no matter the interest rate) will give you a feeling of accomplishment that will keep you motivated to pay off your next biggest debt.
This method won’t save you as much money as paying off your debts with higher interest rates first. However, a 2016 study published in the Harvard Business Review found that people using this method paid off credit card debt faster than those using other methods, simply because it’s easier to stay motivated.
How it works: Make a list or spreadsheet of your debts (with the smallest principle debt first), along with each respective debts’ minimum payments. While making the monthly minimum payments on each loan, throw as much extra money as you can toward the smallest debt.
Once it’s paid off, take the minimum payment you were paying on that loan and add it to the minimum payment on your next-smallest debt (there’s the snowball). Repeat the process until you are debt-free.
The Debt Avalanche Method
This method is also known as the ladder or debt-stacking method. Unlike the snowball method, which is structured around behavior and motivation, the avalanche method is about streamlining your debt repayment so that you save the most money on interest. It can require more discipline, but keeping track of how much you are saving in interest can be a great motivator.
How it works: Make a list of all your debts by order of interest rate, highest to lowest. While making your minimum monthly payments on all the debts, “attack” the highest interest rate loan with as many extra payments as you can.
For extra motivation, use an extra payment loan calculator like this one to keep track of how much you’re saving in interest.
The Debt Snowflake Method
Taking the snow metaphor even further, the “snowflake” can be applied to either the snowball or the avalanche method. The snowflake method involves finding extra income on top of your usual income to help pay down your debt faster.
How it works: Scrape together extra micro-payments by any means possible: using credit card rewards cash, taking those cans of spare change to the bank, selling old textbooks or collectibles online, or even taking on a few side gigs. Then, put the cash from these projects toward your extra payments.
The Debt Fireball Method
Moving beyond the snow metaphors, the “fireball” is a hybrid of the snowball and avalanche methods that can help you blaze through costly, “bad” debt faster. Categorize all debt as either “good” or “bad,” and attack the bad debts first. (Debts with a less than 7% interest rate are “good.” Debts with a higher than 7% interest rate are “bad.”)
How it works: Once you separate the bad debts from the good debts, you’d list your bad debts from smallest to largest based on their outstanding balances.
While making the minimum monthly payments on all outstanding debts, you would funnel any excess funds to the smallest of your bad debts. When that’s done, you’d then focus your attack on the next smallest bad debt. Torch those balances until all your bad debt is repaid, then you’d keep paying off your good debt on the normal schedule.
Consolidating Debt Under a Single Loan
One final strategy for paying down debt is converting all your various debts into a single loan, commonly referred to as loan consolidation. This method can dramatically simplify your loan repayment. Instead of multiple loans and multiple interest rates, you’ll have one loan and one interest rate. And ideally, this new interest rate will be close to the average of all your interest rates combined—or even lower.
How it works: Shop around for the best loan consolidation or personal loan offer you can find. Once you find one and are accepted, your lender will grant you a personal loan that you can use to pay your existing loans in full. Then all you have to do is pay back the personal loan, which is just a single monthly payment.
A potential downside to consolidating your loans is that your repayment period might get extended, meaning you could pay more in interest over time, if you only make minimum payments on your personal loan. However, when you sign up for a personal loan, you can make sure to choose a loan term that doesn’t extend your repayment period.
Or you could consolidate your debt with a personal loan and then try the snowflake method, making consistent extra payments on your personal loan to potentially get out of debt even faster. Whatever you decide might be right for you, SoFi can help along the way.
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