Debt Avalanche vs Debt Snowball: Which Repayment Method Is Better?
Having multiple debts can make financial planning feel complicated. A credit card balance, personal loan, car financing and other commitments may each have different interest rates, repayment periods and monthly instalments.
One question naturally follows: if you have extra money available, which debt should you repay first?
Two popular approaches are the debt avalanche and the debt snowball methods. Both involve maintaining required payments on all debts while directing additional repayment money towards one selected debt at a time.
The difference lies in how that first debt is selected.
This article is for general educational purposes only and does not constitute financial, investment, tax, legal or other professional advice.
What Is the Debt Avalanche Method?
The debt avalanche method prioritises debts with the highest interest rates.
You continue making the required payments on all your debts, then direct any additional repayment money towards the debt with the highest applicable interest rate.
Once that debt is fully repaid, the amount previously used for it can be redirected towards the next-highest-interest debt.
This process continues until the debts have been cleared.
Why Does It Work?
Interest rates influence how quickly borrowing costs accumulate. When other relevant terms are comparable, reducing a higher-interest balance sooner can reduce the interest charged over time.
This is why the avalanche method can be effective for borrowers who want to minimise total interest costs.
What Is the Debt Snowball Method?
The debt snowball method prioritises debts by outstanding balance, starting with the smallest.
You continue making the required payments on all debts and direct extra repayment money towards the smallest balance.
After clearing it, you redirect that repayment amount towards the next-smallest debt.
The method is designed to create visible progress. Clearing an entire balance can provide a sense of achievement and make it easier for some people to maintain their repayment routine.
A Worked Example: Three Debts
Suppose a borrower has the following debts:
| Debt | Outstanding balance | Illustrative annual interest rate |
|---|---|---|
| Credit card | RM4,000 | 18% |
| Personal loan | RM12,000 | 10% |
| Other financing | RM20,000 | 5% |
| Total | RM36,000 | — |
Assume the borrower can allocate RM1,500 per month in total towards these debts, including required minimum payments.
Using the Avalanche Method
- Prioritise the credit card at 18%.
- Once it is repaid, prioritise the personal loan at 10%.
- Finally, direct the available repayment amount towards the remaining financing at 5%.
Using the Snowball Method
- Prioritise the RM4,000 credit card balance.
- Once it is repaid, prioritise the RM12,000 personal loan.
- Finally, repay the RM20,000 balance.
In this particular example, both methods happen to produce the same repayment order because the smallest balance also has the highest interest rate.
The difference becomes clearer when the debt balances and interest rates do not follow the same order.
What If the Smallest Debt Has the Lowest Interest Rate?
Consider a different situation:
| Debt | Balance | Illustrative annual interest rate |
|---|---|---|
| Debt A | RM2,000 | 4% |
| Debt B | RM8,000 | 18% |
| Debt C | RM15,000 | 9% |
The snowball method prioritises Debt A because it has the smallest balance.
The avalanche method prioritises Debt B because it has the highest interest rate.
This illustrates the fundamental difference between the two approaches.
Which Method Costs Less?
Under otherwise comparable conditions, prioritising the highest-interest debt generally reduces interest costs more efficiently than prioritising a lower-interest debt.
However, an exact comparison requires more information than the outstanding balances and headline rates alone.
Actual outcomes can depend on minimum repayments, interest calculation methods, fees, promotional rates, repayment timing and the terms of each financing agreement.
Some loans may also have early settlement charges or rebates that affect the cost of repayment. Check the relevant agreement before making additional payments.
Which Method Is Easier to Maintain?
A repayment strategy only works if it can be followed consistently.
The avalanche method may appeal to people who prefer a cost-focused approach and are comfortable waiting longer to clear individual balances.
The snowball method may appeal to people who value smaller milestones and find visible progress motivating.
Neither method eliminates the need to make required payments on all debts or to review the overall affordability of existing commitments.
Before Making Extra Repayments
There are several practical considerations to review:
- Keep required payments current. Falling behind on other accounts may result in additional charges or other consequences.
- Review interest rates and terms. Promotional rates, fees and settlement conditions may change the calculation.
- Consider emergency savings. Using every available ringgit to repay debt can leave little cash for unexpected expenses.
- Check early settlement conditions. Some financing arrangements have specific rules for additional or early repayments.
- Address spending patterns. Reducing existing balances may not improve the overall position if new debt continues to accumulate.
Finance with Alex: A Simple Decision Framework
Imagine two borrowers, each with several debts and RM500 in extra repayment capacity each month.
One prefers to minimise interest costs and is comfortable following a repayment plan over a longer period before seeing a debt fully cleared.
The other has struggled to maintain repayment plans in the past and believes clearing a small balance first will help maintain consistency.
Their circumstances illustrate why the choice is not purely mathematical. Interest costs matter, but so do cash flow, repayment discipline and the likelihood of maintaining the plan.
This scenario is hypothetical and provided solely for educational purposes.
Final Thoughts
The debt avalanche method focuses on interest rates, while the debt snowball method focuses on outstanding balances.
When other conditions are comparable, the avalanche method generally offers an advantage in reducing interest costs. The snowball method may provide a more motivating sequence of milestones for some borrowers.
Before choosing either approach, understand the terms of your debts, maintain required repayments and consider how additional payments fit into your wider financial position.
The most useful repayment method is one that reflects the actual terms of your borrowing and can be followed consistently.
Disclaimer: This article is for general educational purposes only and should not be considered financial, investment, tax, legal or professional advice. Actual borrowing costs and repayment outcomes depend on individual agreements and circumstances.