Paying your debts off early can feel like a load off your shoulders, but there isn’t just one way to manage your debts. Here’s what you need to know about debt consolidation and the debt avalanche versus debt snowball methods.
Debt consolidation
If you have various types of loans scattered across multiple lenders, a debt consolidation loan may make it easier to pay off and manage those loans.
A debt consolidation loan offers consumers the ability to roll all their debts into a single loan with just one monthly payment. These types of loans are typically unsecured and come with fixed interest rates.
Some lenders may even send the loan funds directly to your original creditors when you take out a loan.
Debt avalanche
Debt stacking, or the debt avalanche method, is a debt repayment strategy that involves prioritizing debts with the highest interest rates.
To do this, examine each of your debts and find out which ones have the highest interest rates. Order them from highest to lowest, then focus on paying off the debt with the highest interest rate. Once you pay off that debt, move on to the debt with the second-highest rate and so on.
While this can be an effective strategy to save you money on interest in the long run, some people may not find it as enticing since it can take some time to pay off debts in this order.
Debt snowball
The debt snowball method focuses on borrowers paying off debts with the smallest balances first.
With this strategy, you can look into all your debts, then list them out from smallest to largest. From there, you’ll prioritize paying off the smallest debts first.
While you may spend more on interest in the long run than you would have with the debt avalanche method, this strategy can feel more inspiring to some borrowers as they’ll see more wins early on in the process since the balances are smaller.