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What is the Debt Avalanche Method?

Tips for Getting Out of Debt

Are you looking to get out of debt? Want to save as much money in interest as possible? The Debt Avalanche Method is an accelerated debt repayment strategy designed to minimize the amount of interest paid and time holding the debt. Here’s how you can use it.

How the Debt Avalanche Method Works

  1. Collect all your debts and list out their balances and interest rates. Common debts you may have include your student loan, car loan, credit card debt, and medical debts.
  2. Make minimum payments on every debt. This is required to avoid late or missing payment fees and to protect your credit score. This will also help you see how much money you have left over to reallocate towards your debts.
  3. Pay as much as you can towards your highest interest debt. For instance, let’s say you owe $20,000 at 4% interest for your student loan, $10,000 at 3% interest for your car loan, and $1,000 at 20% interest for your credit card loan. With the debt avalanche method, you will want to pay off your credit card debt as soon as you can due to its high interest rate.
  4. Once the highest-interest debt is paid off, move on to the next highest interest debt. Let’s say you paid off the credit card debt from the example in step 3. You will then want to allocate money towards the student loan next as it has the higher interest rate than the car loan.

While the Debt Avalanche Method is the recommended strategy for saving the most cash and time, it requires commitment and may not present results quickly. If you have tried the Debt Avalanche Method and it doesn’t feel that it is working well for you, consider the Debt Snowball Method. The Debt Snowball Method is a similar debt repayment strategy that targets the smallest debts first rather than the highest interest rate debts. Also, it’s highly recommended that you have an emergency fund set aside in case you need the extra funds during a high-expense month before starting any accelerated debt repayment strategy.

[ Learn How to Save for an Emergency Fund | Follow the U.S. Auto Sales Blog ]

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