The debt snowball is a very popular method of paying off debt. This involves making additional payments on your debt, starting with the lowest outstanding balance. You will pay the minimum on all of your loans, but you will send additional money on the debt for which you owe the lowest amount.
Once this low balance debt is paid off, you will start working on the debt with the next lowest balance. Each month, the payment you previously made on the new loan paid off will be added to the next debt you pay off.
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Where does the snowball method of debt come from?
The snowball approach to debt was popularized by personal finance guru Dave Ramsey. He thinks paying off the lowest balance helps you stay motivated first because you get quick wins when you pay off debt.
Unfortunately, this popular deleveraging strategy can be an expensive way to pay off what you owe. This is because you might be spending a lot of time paying off low-interest debt before you even start taking on high-rate debt. This can happen if your most expensive loans also have high balances, so they are late in your snowball.
Rather than using an approach that might let you hold more expensive loans with higher balances, you might want to consider another method of debt repayment.
It could save you a lot more money than the debt snowball
There is actually an easier approach to paying down debt than snowballing debt, and it could end up being a lot cheaper. It’s about refinancing your debt.
If you can apply for a low-interest personal loan and use it to pay off most or all of your other debts, you could eliminate the question of which loans to pay off first. You would no longer have a whole bunch of different debts to prioritize. Instead, you would have a fixed rate loan with fixed monthly payments that you would pay each month. You wouldn’t have to worry about staying motivated or how quickly you pay off each debt as you would have demanded monthly payments which would result in your balance being paid in full at the end of the loan term.
If your refinance loan has a lower rate than your existing debt, you could also save a lot of money compared to the snowball method. Suppose, for example, that you have a large loan at 17% interest that would be far down your list of debts payable if you followed the snowball approach. Instead of paying that 17% rate for a very long time while you work to pay off cheaper debt, you immediately lower the cost of that expensive loan by refinancing.
Refinancing only makes financial sense if you can actually get a lower rate than what you are paying now. But if you have a lot of credit card debt, chances are a personal loan is much cheaper than the current rate on your card. It’s worth shopping around for refinancing quotes before considering the snowball approach to debt, so you can see if refinancing would be right for you.