Extramile Finance

The debt-snowball method of repayment is one of the most trending approaches used by borrowers. It implies clearing smaller repayments first and the larger ones at last. Unfortunately, the traditional method implies clearing larger debts at first.

By clearing larger debts, borrowers would pay less interest and even repay the amount before the due date. Moreover, it also helps to increase household savings and accrue interest through a savings account.

Therefore, the additional savings can prove beneficial in clearing other debts or repaying a large one. Meanwhile, the debt-snowball method only provides a sense of satisfaction for repayment and diminishes the current expenditure.

Unfortunately, the debt-snowball method can prove costly to buyers as it will take a long term to complete small debts. Therefore, the interest accrued on the amount lasts for a longer tenure than usual.

6 Steps for Using the Debt-Snowball Method

●    Make a Budget

Budgeting is one of the best practices to become debt-free. It enables a person to learn about ongoing used and unused expenses. Additionally, it helps in making changes to the current expenses.

It is also true that budgeting can make a person healthy. For example, it will reduce eating from outside and having a healthy homemade meal. Moreover, there are two significant methods of budgeting. These include the zero-sum and 50/20/30 rules.

According to a source, the zero-sum budgeting method involves subtracting the expenses from the income and getting a zero amount. It means you have nothing left in the bank to make more payments or savings. However, the method helps in becoming debt-free fast.

Optionally, the 50/20/30 rule implies 50% of income goes for fixed expenses, 20% for financial goals, and 30% for variable expenses. The flexible expenses include movies, eating out, hobbies, etc.

On the other fixed expenses consist of utilities like gas and electricity, mortgage or rent, insurance, etc. By building a budget using any of these methods, you can easily pay off using the debt snowball method.

●    Enlist the Debts

As mentioned earlier, the debt-snowball method involves paying off smaller debts first and the larger ones at last. Therefore, you should start enlisting the debts in the same manner or arrange them after enlisting.

Unfortunately, many loans have a high interest rate. According to the traditional methods, paying the debt with the highest rate would be important. However, you can change the APR by moving the debt to a zero-interest promotion credit card.

By doing so, you would no longer accrue interest on existing debts until the promotional tenure expires and make regular repayments. Moreover, using the debt-snowball method would become much easier with a single repayment plan.

Unfortunately, transferring the entire debt to a zero-interest credit card would also accrue higher repayments to clear the debt in a short time. Optionally, you can take loans that come to your home and make repayments to lower the existing debts.

●    Set Up Minimum Repayments

The best way to avoid late payment charges and avoid accruing more debt is by setting up automated minimum repayments. The best practice would involve doing this step at the earliest because it may take time for approval or status information.

However, you should be aware that minimum repayments come with a cost. They continue to grow debt overhead for a long tenure. Therefore, paying more than the minimum repayments would prove beneficial.

Unfortunately, if you follow the debt-snowball method and make minimum repayments, the interest could become high. For example, if you have a £5,000 and a £1,000 with an APR of 24.9%.

Repaying £200 plus minimum will take two years and an additional £1,047 in interest for £5,000 debt. Also, clearing the £1,000 with the same arrangement would accrue £55 as interest.

On the other hand, the debt-snowball method would take 19 years and four months for clearing the £1,000 debt. Likewise, the £5,000 debt would clear in 32 years and eight months. The former and latter would accrue £1,655 and £9,135 as interest.

Therefore, before going ahead with the debt-snowball method, make sure to evaluate the length of the debt cycle. Also, think whether the minimum repayment would prove useful over the long term.

●    Start Paying Off the Lowest Debt

After sorting the debts to include in the debt snowball method and managing the budget, it is time to start paying off the lowest debt. At this point, the best practice would involve creating a secondary mode of income.

The temporary phase of working a second job even after a hard first job would help to cover more repayments. Additionally, it will help to increase the amount in the savings account and accrue yearly interest.

Besides this, you can add more money to the 50/20/30 rule of budgeting. It means you would have additional income, especially covering 30% of variable expenses like hobbies, subscriptions, etc.

A few prominent earning a second income is by doing a part-time job, renting a space, selling unused products, etc. As per the debt-snowball method, paying off the lowest debt would keep clearing debts and keep bringing the next ones forward.

So, a second or passive income would cover the minimum debt expenditures while the savings get depreciated. However, transferring the debt to a zero-interest credit card would make it much easier to repay.

●    Track the Progress

The debt-snowball method helps to reduce household expenses. Therefore, it is crucial to track the progress. Additionally, it is necessary to stop payments for cleared debts. Over-paying a debt may require following the refund procedures.

Moreover, tracking the progress would keep you motivated and open doors for new investment opportunities. The best method of tracking is through an excel sheet or an online calculator. The assessment would help to learn about the tenure left for clearing the existing debt and amount.

At this point, you can determine the need for 12 month loans from direct lenders for bad credit to manage expenses. Moreover, the debt calculator would estimate the time a borrower becomes debt-free.

Therefore, the income earned would help cover fixed expenses and eliminate large costs for the household. Becoming debt-free would also eliminate the need for credit cards and additional loans. Additionally, it would improve the credit score.

●    Keep Repeating and Compare Options

One of the biggest competitors of the debt-snowball method is debt-avalanche. It requires covering the debts with large interest rates at first. Therefore, it is entirely the opposite of the debt-snowball method.

The debt-avalanche method requires ignoring the account balance. Also, research suggests that the debt-snowball method motivates more people. Meanwhile, the debt-avalanche method helps in saving more money.

According to a source, repaying large interest rate loans helps to save more in the long term. Moreover, it leads to lower loan repayments as it enlisting debt from the highest to the lowest. But, additionally, it does not mean that either of the methods would match everyone’s expectations.

The method of repaying the debt would differ based on the type of borrowing. For example, a person with a mortgage would incur large costs through the long-term approach. Therefore, covering such expenses is more important than others.

Besides this, a government or enlisted private financial advisor can help manage finances, diminish expenses, and increase savings. Therefore, taking advice from an expert even at an additional cost would prove much more worthwhile.

After following these six steps, you can easily determine whether the debt-snowball method is useful for you or not. Also, the budgeting methods would put you at ease at managing household costs. If the debt recovering methods don’t help cover the existing costs, you can avail of personal installment loans or other options.