Introduction:
With the ever increasing costs for all items be it essential or non essential, most of us would need loans to afford it. With more a zillion banks offering you cheap money, it is normal for you to have multiple loans at the same time. By the time you realise the enormity of the situation in all likelihood you will be spending most of your salary in repaying the same.
The payment made for different loans over a period of time not only burns a hole in your pocket but additionally leaves you exhausted. In such situations you would need additional money and also motivation to repay the loans.
One such method for Financial freedom from these loans is Debt Snowball Method. This method works on the basic principle of attacking your smallest debt first and then as each small debt gets over you start attacking the next smallest debt. This article will help you in understanding the concept better.
Have your ever seen a Snowball? The whole idea is that a small round ball of snow when rolled down the hill gathers momentum and also absorbs the snow on the way, thereby becoming a bigger ball after each roll. It acquires humongous size by the time it rolls down a large hill. The Debt Snowball method also uses the same idea, wherein the user has two benefits, one emotional and the other financial.
Let’s get a better idea of the concept. Let us say Mr. X has three debts. A House Loan, Car Loan and Personal Loan.
| Type Of Loan | Amount(In Lakhs) | Duration(In Years) | Interest Rate(In %) | Minimum Emi |
| House Loan | 20 Lakhs | 20 | 8 | 16729/- |
| Car Loan | 5 Lakhs | 7 | 6 | 7304/- |
| Personal Loan | 1 Lakh | 2 | 12 | 4707/- |
Now, Mr. X is currently able to pay the Minimum EMI per month comfortably and has an additional liquid cash of Rs. 3000 which he can deploy in repaying the EMI. As per Debt Snowball Method, he should deploy that cash in repaying the Personal Loan. So, instead of Rs. 4707/- which he is currently paying as minimum EMI, if he was to pay Rs. 7500/- per month as EMI, the Personal Loan which normally is having a duration of 24 months reduces to 15 months. That is a saving of 9 months.
After he successfully repays the Personal Loan in 15 months, Mr. X has a cash reserve of Rs. 7500/- which he can use to pay his Car Loan. As per the table, if you were to see, he will be able to double the payment to current Minimum EMI, thereby reducing the duration to half.
Advantages:
- The ability to reduce the durations once availability of additional cash.
- The emotional satisfaction that a user gets from achieving financial freedom and also a sense of accomplishment in closing loans.
- Can be less stressed as the debt commitments are getting over sooner.
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