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Debt snowball vs avalanche

Two ways to pay off several debts with the same money each month. The avalanche costs less interest. The snowball gives you a win sooner. Put in your own debts to see how far apart they really are.

The two methods

Both start the same way. You keep paying the minimum on every debt, so nothing goes into arrears. Then you find an extra amount each month, even a small one, and put all of it on one debt. When that debt is paid off, its minimum and the extra move to the next one, so the amount you throw at each debt grows as you go. The only difference is the order.

The avalanche: highest interest rate first

List your debts from the highest interest rate to the lowest and attack the top one. Every rand of extra payment goes where it saves the most interest, so on paper the avalanche is always the cheapest way out. Its weakness is that the most expensive debt is often a big one, so it can be months before you see a debt disappear.

The snowball: smallest balance first

List your debts from the smallest balance to the largest, whatever the interest rate. The small ones go quickly, and each one you close frees up its minimum for the next. You pay a little more interest than with the avalanche, but many people find the early wins keep them going, and a plan you stick with beats a cheaper one you give up on.

A worked example

Three debts and an extra R1 000 a month on top of the minimums. The calculator above starts with these figures.

The avalanche saves R1 303.56 over the snowball here, and both finish in the same month. The real saving is the extra R1 000: it cuts the time roughly in half and saves about R19 786 in interest compared with paying only the minimums. Whichever order you choose, paying more than the minimum matters most.

Which should you choose?

• If your interest rates are far apart, the avalanche saves real money. A credit card or personal loan at over 20% next to a vehicle loan at 12% is a big gap.
• If your rates are close together, the two cost almost the same, so pick the snowball if quick wins help you.
• If one small debt is causing stress, such as an account handed over or a family loan, clearing it first can be worth a little extra interest.
• Either way, stop adding to the debts you are paying off. A plan only works if the balances go one way.

Finding the extra payment

The extra amount usually comes from a budget. Write down what comes in and what goes out for one month, then look for a few hundred rand: a subscription you do not use, takeaways, airtime on a contract you could move to prepaid, or a raise or bonus you put straight onto the debt. How to budget on a South African salary walks through it. Any money you get back from SARS after your tax return can go the same way.

Things to check first

• Ask each lender for a settlement figure. The balance on a statement is not always what it costs to close the account.
• Some loans charge a fee for settling early, and some credit insurance stops when the account closes. Ask before you settle.
• If you cannot meet the minimum payments at all, debt counselling (debt review) under the National Credit Act may help. Counsellors must be registered with the National Credit Regulator.

General information to help you plan, not financial advice. The calculator assumes fixed rates and minimums; real accounts change both.