These stats tell us one thing: America is a nation of borrowers.
While taking on debt isn’t a bad financial decision, you need to have the means to service all your loans. If you don’t have the means, you’ll spiral into debt.
If you’re already in this situation and looking for ways to get out of debt, you’ve probably heard about the debt snowball method.
Continue reading to learn how debt snowball payment works and how you can use it to your advantage.
What’s the Debt Snowball Method?
When you have multiple debts, you know how frustrating it can be to keep up with the balances. Because they charge different interest rates and have varying repayment periods, you won’t be paying the same amount for each loan.
This is where the debt snowball method comes in handy.
This is a debt reduction or repayment strategy that focuses on prioritizing the loans with the smallest balance. You pay more money than your typical repayment amount for this loan while sticking to the minimum repayment amounts for all your other loans.
To illustrate, let’s say you have 3 loans, as follows.
- Loan A: $1000 with a $50 monthly repayment amount.
- Loan B: $2000 with a $100 monthly repayment amount
- Loan C: $3000 with a $150 monthly repayment amount.
Under the debt snowball method, you will increase your monthly repayment method for the $1000 loan. Perhaps you can pay $80 a month while keeping the other amounts constant. With a higher repayment for the $1000 loan, you will clear it off sooner.
Next, move on to the loan with the lowest balance, which, in this case, is loan B. You can increase the repayment amount by the same amount of money you increased for loan A. Sticking to our example, this will mean making at least a $130 repayment every month.
Bear in mind that this method only takes the loan balance into consideration – not the interest rate. This is important to note because there are methods that focus on paying off the loans with the highest interest rate first.
How to Make the Debt Snowball Method Work for You
While this method looks simple, it can be difficult to implement if you’re not in a position to increase your minimum payment. This doesn’t mean you give up on this strategy.
A good hack is to try and increase your income. You can look for a side job and use the second income to pay off the loans, but in accordance with the debt snowball method. Don’t spread the income across all your loans. Focus on paying off the one with the smallest balance.
If you’re totally unable to put this method to work, you can try debt consolidation. This involves taking out one big loan and using the money to pay off all your other loans. Be sure to learn more about debt consolidation loans before taking the next step.
Debt Snowball Payment Works!
If you’re struggling with multiple debts, perhaps it’s high time you tried the debt snowball method. This is the fastest way to pay off your debt. And when implemented correctly, debt snowball payment works!
Keep reading our blog for more debt management tips and insights.