Much like a great mass of snow falling swiftly down a mountainside, the debt avalanche method expeditiously helps you pay off high interest debts first, bringing down your obligations. Souqalmal.com breaks down the debt avalanche strategy and elucidates why it may be the best method to pay off your debts.
If you are like any other individual working in the UAE, chances are that loans, EMIs (Equated Monthly Installments) and debts are weighing you down. In order to gain control of your financial situation, you must have an aggressive repayment plan in order. The truth is, c.
For the analytical and the realist, the debt avalanche technique may be the answer. Read on to understand how this technique can help you become debt free sooner than you had thought possible.
Debt Avalanche – Explained
The main idea behind the debt avalanche plan is that you will be paying lesser interest over time, which makes it the cheapest and most logical debt repayment technique. This accelerated debt payoff method prioritizes your high-interest debts. You begin by settling your debts in order of decreasing interest rates, regardless of the amount you owe on each. Your aim is to make minimum payments on all your debts but allocate all remaining funds to the debt with the highest interest rate. Once this debt has been entirely eliminated, you concentrate on the next highest-interest bearing loan.
How Does It Work?
As an example, let’s assume you can free up AED 5,000 for loan repayment from your paycheck each month after accounting for rent, utilities and other everyday expenses. The loans you currently owe include:
- AED 100,000 ($27,250) student loan at 4.5% interest rate
- AED 80,000 ($21,800) car loan at 3.5% interest rate
- AED 40,000 ($10,900) due on credit card at 40% APR (Annual Percentage Rate)
- AED 25,000 ($6,812) personal loan at 3% interest rate
Applying the debt avalanche technique, first add up all the minimums that need to be paid on each of these loans. Then calculate how much extra from the AED 5,000 ($1,363) budget you can afford to pay beyond the total of your minimums for the loan with the highest interest rate – in this case the credit card. The credit card will be your top priority until the debt has been completely paid off, after which you will need to start focusing on your student loan. Thereafter, your extra funds can go towards your car loan and finally, to repay the personal loan.
Debt Snowball vs. Debt Avalanche
In contrast to the debt avalanche method, the debt snowballing technique requires the debtor to pay off the smallest loan first, irrespective of the interest owed. This is especially inspiring since the loans are eliminated quicker.
The debt avalanche method, on the other hand, requires immense discipline and is designed for the patient. There are no small, immediate victories to keep you motivated. However, these minor drawbacks don’t necessarily negate the effectiveness of this technique.
Mathematically speaking, debt avalanche in all probability will save you the most time and money than any other repayment strategy. By paying off more than the principal amount on your loan, you minimize the interest and save significantly over time.
Using Debt Avalanche to Your Best Advantage
To cope with the debt avalanche method, perseverance is key. With due diligence, consistency in payments and commitment to tackling debts in order, the debt avalanche technique can not only help you tackle debts faster, it can prove particularly economical in the long run.
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