Debt avalanche vs snowball: which loan to pay off first?
A card at 42%, a personal loan and a bike loan: clearing the costliest first saves ₹13,106 over smallest-first. And when the snowball still makes sense.
5 min read
You have three loans and some spare money each month. Which loan should you pay off first? Two methods answer that: the debt avalanche clears the costliest loan first, the debt snowball the smallest. Here's how they differ on a credit card, a personal loan and a small two-wheeler loan.
Debt avalanche vs snowball: an example
| Loan | Owed | Rate | EMI |
|---|---|---|---|
| Credit card | ₹2,00,000 | 42% | ₹10,000 |
| Personal loan | ₹4,00,000 | 14% | ₹13,000 |
| Two-wheeler loan | ₹60,000 | 11% | ₹3,000 |
Pay every EMI either way. The question is only where the extra ₹15,000 goes, and where each EMI goes once its loan is gone.
Which saves more money?
Figure 1 from the Loan payoff calculator
Interest paid on the same three loans
- ① Avalanche: costliest firstLeast interest₹1,04,108
Debt-free in 1 yr 7 mo
- ② Snowball: smallest first₹1,17,213
Debt-free in 1 yr 7 mo, first loan gone in 4 mo
- ③ Only the EMIs₹2,54,973
Debt-free in 3 yr 3 mo
How to read it
- 1The card at 42% goes first. Each rupee there stops the costliest interest, so the total is lowest.
- 2The two-wheeler loan is gone in 4 mo, a quick win, but the card keeps charging 42% meanwhile: ₹13,106 more in all.
- 3Without the extra ₹15,000, the loans run 3 yr 3 mo and cost the most.
The National Centre for Financial Education puts it plainly: high-cost debts cost more than savings can earn, so pay them first.[1] Credit cards are why that matters more in India. The RBI makes card issuers show their interest as a yearly rate,[2] and that rate is often 36 to 42%. Little else you owe comes close.
When the snowball method makes sense
The snowball isn't wrong, it's a trade. Research from Kellogg found that closing small balances first helps people stick with repaying and clear their debt: each closed loan is a win that keeps them going.[3]
- Pick the snowball if your loans charge similar rates, or a quick win is what keeps you paying extra.
- Pick the avalanche when one loan is far costlier, like a credit card. The gap here was ₹13,106.
These three loans and ₹15,000 extra are filled in. Switch between the orders and add your own loans.
What this doesn't mean
- Never miss an EMI to pay extra elsewhere: late fees and a lower credit score cost more than either method saves.
- Home and education loans can carry tax breaks in the old regime, which lowers what they really cost. The planner can rank by rate after tax.
- Stop new card spending while you clear the card, or the avalanche never ends.
Interest is charged monthly at each loan's rate; a closed loan's EMI moves on to the next. Card EMI is a fixed payment here, for illustration only.
Sources
- [1]Financial Education Handbook, p. 7: high-cost debts cost more than savings earn, so pay them first (opens in a new tab)National Centre for Financial Education (RBI, SEBI, IRDAI, PFRDA)
- [2]Master Direction: Credit Card and Debit Card Issuance and Conduct (card interest shown as an annual rate) (opens in a new tab)Reserve Bank of India · 2022
- [3]Can Fighting Small Battles Help Win the War? Evidence from Consumer Debt Management (opens in a new tab)David Gal and Blakeley McShane, Journal of Marketing Research (Kellogg) · 2012