Debt Payoff Strategies [The Debt Avalanche Strategy]

Benefits of the Debt Avalanche Strategy:

  • It is the fastest possible way to get out of debt without using debt consolidation techniques.
  • You pay less interest that you would using the Debt Snowball Strategy.
  • It is a proven and structured technique that has helped many people get rid of their debt.
  • It’s simple to do!

Cons of the Debt Avalanche Strategy:

If your high interest “focus account” is a large amount, it can take some time to see progress compared to the Debt Snowball Strategy, so you will need to be a bit more disciplined. But remember that even though progress may seem slow, in the long run, it is a much faster and cheaper technique.

Using this strategy, you start by focusing on the debt that has the highest interest rate.

The idea is to get rid of the higher interest debt which is going to help you in the long run.

The first step: Planning!

Build a spreadsheet of all your accounts and order them from the highest interest rates to the lowest.

You are going to start by paying only the minimum installments on all the accounts, then dumping all remaining cash into the “focus account” (The account with outstanding amounts that has the highest interest rate)

You will notice that credit cards, personal loans and clothing accounts will have much higher interest rates that vehicle finance for example.

This is because credit cards etc. is unsecured debt. Meaning that there is no asset attached to the debt that the banks can repossess in case of non payment, making it higher risk to the banks.

Remember, this technique requires that you ONLY make the minimum payment on all accounts, then dumping all money left over into the “focus account”.

Once the focus account is paid off, you have now free’d up the minimum payment you used to pay to that account, and you are now able to tackle the next high interest account with this additional money.

Keep doing this month after month, and every time you pay off an account, you add that accounts minimum payment to the funds available to pay off the next account.

As the name implies, the avalanche effect causes the volume of funds paid toward the debt increases exponentially.

How to pay off your credit card using your vehicle finance

What I’m about to share can save so much money. I mean tens of thousands of rands and I know this because I’ve already been doing this ever since I worked at a financial institution. I’m really excited and what we’re going to talk about today is collateralizing debt. That may sound like a super fancy term but it’s essentially a way of saying, “Hey, let’s pay off our credit card debt really quickly. Build up our credit score really quickly and save a lot of money really quickly.” It’s all good stuff and it’s really, really easy to do. Super pumped about this.

Have you guys ever seen those advertisements for five tricks to pay off credit cards fast or one secret the banks don’t want you to know about. I don’t ever watch that stuff so I have no clue what they’re talking about. Maybe this is it but this is my version of that. This is my secret of paying off credit card debt quick or lowering your interest rate quick on your credit card debt.

The whole thing about this video is credit cards, personal loans, lines of credit, they are all called unsecured debt and therefore the interest rate is normally pretty high. Where as like a house or a car there is something backing up that loan like a car title or the deed to the house and that makes those interest rates lower. Because there’s less risk to the bank there’s something real about that debt. A lot of people find themselves they’ve got their car loan at let’s say three percent and they’ve got their credit card at 15 percent. Ones obviously a lot lower and ones a lot higher. The thing is most people just go on for their entire lives paying the debt as it is. What I try to do every single day at work in order to save people as much money as I can is I let them know this; why have credit card debt if you have a vehicle loan that’s at three percent? What a lot of banks will do is they will transfer that debt off of the credit card and on to the car loan.

This can happen when you refinance, it can happen when you are buying a car. There’s so many opportunities to do this. People need to start taking advantage of this because this will save so much money. The way it works is this, let’s say you’ve got a car loan that you have financed somewhere. Let’s pretend that you owe R10,000 on it and maybe it’s worth R15,000. Maybe you’ve had this car loan for a couple of years and you’ve had the chance to build equity. Then you’ve also got this R3,000 credit card debt and it’s at 15 percent. What you can do is say, “Look, bank, I would actually like to add R3,000 to my car loan. I want to increase the size of my car loan.” Whenever they’re adding money to your car loan they’re going to put that same dollar amount into your savings or your checking account.

What you do with that money is you just go pay off your credit card. Simple as that. Your credit card goes from like you owe R3,000 to you owe nothing. Your car loan says all right, I went from R10,000 owed to R13,000 owed but now your R13,000 worth of debt is all at a car loan interest rate. You don’t have to worry about that 15 percent credit card anymore. It’s done. You’ve saved money because your interest rate went down and more than likely your credit scores going to go up because of your capacity ratio. If you don’t know what that is, check out the last video I made about credit cards and how they affect your credit.

Your credit score will go up because of this. To a lot of you guys this may be like that doesn’t seem like that big of a deal but it’s huge. I mean it is insane. I mean literally this year alone we’ve probably done hundreds of thousands of dollars of loans I know. I bet because of all this we’ve probably saved at least R50,000 for people. To me that’s not small money. Guys, take advantage of this. If you think you’ve got equity in a vehicle but you also have some unsecured debt, try and transfer it over. Honestly guys this is so easy to do and can have such a big impact.

What I’m going to do is share one I’ve done recently and you can see kind of how this stuff works. This member that I recently helped out had a major credit card and it was at R6,300 and it was at 15 percent. Her balance was 6300, rate was 15 percent. She also had a loan of R6,900 and the interest rate was at 6.9 percent. She paid between both of these, this credit card and this loan, she paid R450 per month. Now she keeps these loans exactly as their set up now the math on it says that it will take 35 months to pay off and in the end she will pay R2,518.68. That’s what it’s set up as right now. I was talking to this member and it turns out that she owes her car free and clear. She’s got these debts but their unsecured but she’s got her car paid off. We talked about saying why not take out a loan against the value of your vehicle, pay down all of those other debts down to zero, now you only have one payment to make and the interest rate should be a lot less.

Here’s how the math on that worked out. Now she has one auto loan for R13,200, the total of both those other two previous loans. She kept the monthly payment the same. She said, “You know what, I want to pay this off as fast as possible. Let’s keep the monthly payment the same. I’ll keep paying R450.” Because her interest rate went down so much, she shortened the term length from 35 months to only 30 months. The total interest it went from R258.06. That’s how much money she saved. She went from R2518.68 to R258.06. She didn’t pay anything to do this. It wasn’t complicated. It’s already finished and she just saved that money.

That’s what I wanted to share with you guys today. It’s so simple. Please look into this and what I’m going to start doing, like I said earlier, is I’m going to start sharing some of these success stories and I’m going to use real world members from what I’ve helped people out with and show you how much money they saved by doing this. As always, if you’ve got any questions, comment below. Get in touch with me. I’d be happy to go over everything with you. If you guys already know about this, comment below and show us how much money you’ve saved because of this because I want this to catch on. This is what I want to do to help people save money.