Avalanche or snowball: which debt to pay off first

With a single debt, the question is how much more to pay. With several, another one appears: if some money is left over this month, which debt does it go to? Two simple rules answer it, and both have names: the avalanche pays the debt with the highest rate first, and the snowball pays the one with the smallest balance first. The examples use reais and compound interest.

The minimum, the leftover and what a paid-off debt frees

Every debt asks for an amount each month: the financing instalment, the card's minimum. You pay that anyway, on every debt. The leftover is what comes after: the extra you can add, plus what each paid-off debt no longer takes. The strategies decide only about the leftover.

When a debt ends, the amount it asked for each month does not leave the budget: it moves on to the next one. That is why a plan speeds up along the way, and it is what gives one of the strategies its name. Without passing that amount on, paying off a debt would only leave money idle.

Avalanche: the highest rate first

With the avalanche, the leftover goes to the debt with the highest interest rate, whatever its size. The reason is arithmetic: each real that leaves a debt at 12% a month avoids more interest than a real that leaves one at 1.5%. When the highest-rate debt ends, the leftover moves on to the next one. With the same monthly budget, it is as a rule the way that pays the least interest.

The rate that matters is the effective monthly one, with everything counted: comparing one contract's nominal rate with another's effective rate leads to paying in the wrong order. The contract check page shows the rate a contract really charges from what it shows.

Snowball: the smallest balance first

With the snowball, the leftover goes to the smallest debt, whatever the rate. It closes accounts sooner: each paid-off debt is one bill fewer and an amount that moves on to the next. That may cost more interest, because the expensive debt keeps growing while the small ones are paid. What the snowball gives in return does not show in the interest calculation: it is achievements sooner, which for some people helps keep the plan going. The calculation does not measure that, and the page does not say which to choose.

An example with three debts

A revolving credit card balance of R$ 6,000.00 at 12% a month, with a minimum of R$ 900.00; a loan of R$ 2,000.00 at 1.5% a month, with an instalment of R$ 250.00; and a car financing of R$ 15,000.00 at 2.5% a month, with an instalment of R$ 838.69. The instalments ask for R$ 1,988.69 a month, and there is R$ 500.00 more, which makes R$ 2,488.69 every month.

The avalanche pays R$ 913.37 less interest than the snowball and ends a month sooner. The reason is in the first month: the card generates R$ 720.00 of the R$ 1,125.00 of interest, and getting it out of the way early cuts the largest source of it. Against paying only the instalments, the saving is R$ 5,810.20 of interest and 12 months. The snowball, for its part, frees the first debt in month 3, and the avalanche in month 7.

What the extra changes

Even with no extra at all, passing on what each paid-off debt was taking already shortens the plan. The more extra, the sooner it ends:

With no extra, the two strategies tie in this example, and the plan still saves R$ 1,149.01 of interest compared with the instalments alone, which take 24 months. With R$ 1,500.00 more both end in 8 months, and the difference in interest, R$ 605.60, is what the order still decides.

When the minimum does not cover the interest

A card's minimum is often smaller than the month's interest. In the example the card's interest is R$ 720.00 in the first month: with a minimum of R$ 600.00, the debt would go from R$ 6,000.00 to R$ 6,120.00 after the first payment. Paying only the minimum does not reduce the debt: it grows, and the calculation shows that, on its own, it never ends.

With R$ 500.00 more, the plan ends in 15 months either way, but the avalanche pays R$ 8,249.65 of interest and the snowball R$ 9,559.65: the order matters R$ 1,310.00. When a debt is growing, leaving it for later means letting the most expensive one grow. The law limits what revolving credit can charge in total, but the limit still allows a very high cost, and the plan uses the rate you enter, without applying that cap. The guide on paying off debt or investing shows how to compare what an expensive debt costs with what the money would earn.

What the calculation does not see

A payment plan leaves out whatever is not in the numbers you type. Before deciding, weigh these too:

• Monthly charges. Insurance and fees inside an instalment do not come in as a separate debt: the plan works with the instalment as you enter it.
• Rates that change. The plan assumes the same rate until the end. Variable interest and card promotions fall outside that.
• A discount for paying early. A contract may cut the future interest when it is settled, which the guide on paying ahead explains. And if the debt is already late, renegotiation may change the rate before the order matters.
• Reserve and the unexpected. The plan assumes the same extra every month. A month without it delays everything, and the emergency reserve is left out.
• Swapping a debt. Moving an expensive debt to a contract with a lower rate may be worth more than any order of payment; the credit portability page compares another bank's proposal with the current contract.

How Finasst builds the plan

On the Exit plan page, enter the extra per month and each debt, with balance, effective monthly rate, kind and payment, or, if you have an account, bring in the ones you saved in My debts. The result appears at once, with no account needed and no simulations spent: the three ways side by side, in which month you are free, the interest of each and the order in which the debts end. Nothing you type is sent or kept. The page describes what the calculations show, with the assumptions it states, and does not recommend a strategy.