Sometimes being in debt can feel overwhelming. You may feel like your drowning as you pay off your student loans, credit cards, automobile, and other loans. It’s important not to get discouraged. Take action instead! One way to do that is to use the snowball method of paying off loans. It’s designed to give you confidence by paying off small debts first.
What is a creditor?
A person or financial institution that lends you money
Tactics and considerations
- All repayment plans start with a budget. You need to know how much money you’re working with each month. Consider the 50-30-20 budget or the envelope method.
- Next, organize your debts from smallest to largest.
- Use as much of your monthly income as you can to pay off the smallest loans first, since it will be the easiest to pay off quickly. You will need to pay more than your monthly minimum payment to speed up the process. You will also continue making the minimum payments each month on the other loans.
- The theory behind the snowball method is that you will gain confidence and feel better about your financial life as you pay off the smaller loans more quickly.
- Consideration: the debt snowball method prioritizes paying off the smallest debts first, not the ones with the highest interest rates. While paying off smaller loans quickly might help you feel better, high interest rate loans may cost you more in the long run.
- Also consider other ways to increase your income, such as finding a side gig, or asking for a raise at your current job.
What is a balance?
The amount of money you owe a creditor for a loan
You have four loans:
1) A credit card loan with a balance of $1,000
2) A car loan for $5,000
3) Student loans for $15,000
4) A mortgage for $150,000
Pay off the $1,000 balance first (credit card loan balance). Next pay off the car loan. Then focus on the student loans, and finally work on the mortgage.