Repaying Loan Debts Using The Snowball Method

Repaying Loan Debts Using The Snowball Method

Here a car loan, since zero percent financing, overdrawing the dispo and making purchases on credit card and before you know it, the realization that you are facing a mountain of debt that is getting harder and harder to pay off. What to do? One solution may be the so-called “snowball method”. But what is the point of this method?

Financing, credit cards, instalment loans, real estate loans: There are many ways to get into debt. And the way into the so-called negative debt spiral is creeping but steady. Once caught in the debt trap, good advice is expensive. However, it is precisely in such a situation that one must keep a cool head and face the situation with determination. For as varied as the way into the debt trap can be, the more diverse the ways out of the debt can be.

The combination of different individual loans into one loan and the corresponding rescheduling of the debt would be a possible alternative. Another is to go to a debt counselling service. Another is the so-called snowball method. But no solution will work without first taking a few important steps.

The preparation to repay loans

In the beginning there is always the realization that we are in debt. For those who do not want to admit debts to themselves or have no overview of the amount of their debts will not successfully pay them off, no matter how they are paid off. Therefore, the most important step is to face up to your financial problems and look ahead – in other words, to start reducing the accumulated debts.

The basic prerequisite is an honest, well-founded assessment of your own financial situation – without any whitewashing! The bare figures from bank statements, bills and credit card statements are moved into a clear list or table: How much is outstanding with which creditor at which interest rate for how long?

Budgeting is also part of the preparation. After the listing of debits and credits, the bottom line is to make clear how much is left each month that you can invest in the repayment of your loans.

With the sum that comes out of this calculation, one must now budget and see to it that the most urgent repayment instalments are increased. This may mean reducing or even deferring others – preferably those with the lowest interest rates – until more urgent loans are paid off. It is of course important not to do this on your own. Agreements and negotiations with creditors are the be-all and end-all.

This is how the snowball method works:

If you have managed to realign your budget and service your loans with more than the minimum installments, you can accelerate this process even further with the snowball method. This method of loan repayment involves initially listing the debts in ascending order from the lowest to the highest liability amount. For comparable loans and credits, the effective annual interest rate should be the decisive criterion. In such a case, the loans should be sorted from higher to lower interest rates in descending order. Then the budget is allocated.

In fact, the rate of the lowest loans is increased as much as possible, while the larger outstanding debts continue to be serviced at the minimum rate or are deferred. In this way, the repayment of the smallest loan is pushed forward, the liability is paid off more quickly. If the debts of the first, smallest loan are completely paid off, the budget plus goes into the next larger loan.

This means that the repayment rate of the second smallest loan is increased by the increased rate of the just redeemed, smallest loan. This accelerates the repayment of these debts as well. As soon as this loan is paid off, the rate of the third is increased by the previously spent fixed rate, and so on until one reaches the most expensive and highest loan. When all the small loans have been paid off, one has more budget available to concentrate on paying off the “biggest chunk”.

And while the bank account and the credit investigation company are happy that the much-quoted small animals, which also make dung, are gradually disappearing, this snowball method also has a psychological effect. With every credit paid off, the reward centre is addressed. This gives you a good feeling and you have more incentive to consistently complete this personal repayment plan.