Reducing debt, there are many ways to tackle your outstanding debt, but in this article we are discussing the snowball method. The debt snowball method is a strategy used to pay of debt starting with the smallest loan first, not necessarily the highest interest one. While focusing on the small loan, the minimum required payment on the larger loans is maintained.
Steps to reducing debt the snowball method
- List all your loans by outstanding amount smallest loan first.
- If two loan amounts are very close to each other put the higher interest rate one first. For example you have loan of R1500,00 outstanding at 9% interest rate and another loan at R1550,00 at 10% interest rate rather put the R1550 loan first but normally just put your smallest loan first.
- Pay the minimum required on all loans.
- Pay the minimum payment plus an extra amount towards that smallest debt until the smallest debt is paid off.
- Once the smallest debt has been settled start paying the amount you used to pay on the smallest debt as extra payments for the next debt in line.
- Repeat the steps until debt free.
Can you see where the term snowball method is coming from ? The extra amounts paid toward the larger debts will grow quickly once smaller debts are paid of, similar to a snowball rolling downhill gathering more snow (thus the name snowball method). Your debt repayments are gathering momentum.
Pro's and Con's of the snowball method
As with any debt reduction strategy there are pro's and con's. Many financial specialist will argue that it is not the most economical way to reduce debt, they will rather have you focus on loans with the higher interest rate. But with this method there are some quick wins with has many psychological benefits. One sees a quick reduction in the number of creditors and moneys owed. With quick wins some people have the ability to go on.
Conclusion of the snowball method
Reducing debt using the snowball method has it pro's and cons. It might not be the most financially efficient way of reducing debt, but for a lot of people trying to reduce debt they need to see quick wins while reducing debt.