Repaying multiple loans, whether from irresponsible credit card use or a costly graduate education, can get tiresome after a while.
Living on a tight budget and watching a large portion of your paycheck each month go toward debt payments can be depressing.
The debt snowball method is a strategy many people successfully use to develop momentum when paying multiple debts. While it takes some initial work to set up this method, it is what some people need to create a debt repayment plan that keeps them on top of their finances and motivated to finish.
What is the debt snowball method?
So what is this strategy? The concept is to pay down debts with the smallest balances first. Some schools of thought say you should focus on the debt at the highest interest rate.
With the debt snowball method, you pay as much as you possibly can toward your smallest balance, meanwhile paying the minimum payments on all of your other loans.
As soon as you kill that loan, close the account and start attacking the next lowest balance, regardless of interest rate.
Pros of the debt snowball method:
According to a study in the Journal of Market Research in 2012, the snowball method works best because it builds confidence and motivation. Because you are starting with the smallest debt, you will get some quick wins, which can help you feel like you are making progress.
You will get great satisfaction from paying off a loan and closing the account, which will give you the encouragement you need to move on to the next loan.
“This method of debt
repayment makes you feel good.”
Some people who just pay their debt bills in random amounts or by evenly putting money toward them may feel like they are never making progress.
By focusing all of your effort (minus minimum payments) on one loan, you will have great satisfaction of knocking your loans out of the picture one by one.
Each time you eliminate one loan, you have more money to put toward the other loans, creating the so-called snowball effect.
Cons of the debt snowball method:
There is really only one con. In the long run, you may end up spending more money in interest payments when you pay off your loans in order of balance.
If you have one loan at a 20 percent interest rate and one loan at 3 percent interest rate, it may not make sense to only pay minimum payments toward the 20 percent loan just because the balance is larger than the 3 percent loan.
You will have to make an inventory of your loans and the interest rates and do the math to make sure you do not spend too much more on interest.
The debt snowball method offers a psychological benefit that significantly helps people, but if you will end up wasting too much money on interest, it may not be the best method for you.
Photo source: activerain.com.
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