How To Slap Your Bank Manager With A Fat Debt Snowball

Article Category: Finance

Relive the wintery joys of your youth whilst shoving a fat, juicey snowball into your bank managers face: a debt snowball, that is.

If you haven't already guessed, today we're not going to talk about seasonal fun and snowy escapades. Instead, we're going to look at how you snowball debt. In fact, if it were a real snowball it be one of those monsters that wold bring a look of surprise on you bank managers face – right before it slaps them square between the eyes.

What Is A Debt Snowball?

Sadly, we have to move on from fun and frivolity and look at the real issues at hand. The phrase 'snowball debt' is to describe how we pay off our debts but in a very specific way. At its most basic, the process works a like this:

Example:

You have 5 outstanding loans.
Your first loan is for 3,000.
Your second loan is for 2,000.
Your third loan is for 1,500.

For all of the above sums, we'll assume a 4% interest rate and minimum 200 monthly payment. Adding up those figures, you have a total debt of 6,000 to pay and that figure doesn’t include compound interest.

If you decided to consolidate these loans into your mortgage, paying them off would cost you an additional £5,474.71 over the course of 25 years (assuming an interest rate of 5.5%). Regardless of who you are, the hefty sum to have to pay for the 'pleasure' of getting a loan from the bank is a painful reminder of the cost of debt.

But you don't want to spend years paying off your debt, do you? There are faster and cheaper alternatives. When it comes to servicing your debt, there are numerous recommendations but the simplest way is to snowball your debt.

How Does A Debt Snowball Work?

The basic idea behind this kind of repayment mechanism is to clear your smallest debts first. Once you've cleared your first loan you take the money left over and add it to the payments you're making on the second debt.

Example:

You pay off your first loan of 1,000. You then take the 200 you were paying to service your debt and add it to the amount you're paying for loan 2.

When the second is cleared, you take the total amount you were paying towards loan 2 and add it to the repayments on loan 3.
Easy.

How Much Will It Save You?

Based on the figures given above, using the debt snowball method, you would clear your loans in 16 months and pay a total of 121 in interest. That's a saving of over 5,300 when compared to the consolidation method we talked about earlier.

Before I finish up, I do agree that the approach whereby you tackle the highest interest loans first is a fast way of reducing your debts. The problem lies in basic psychology: by chipping away at your smaller debts first you achieve small victories. Each little win spurs you on. It's like trying to climb Everest without training.

Each little accomplishment will spur you on. Trying to tackle the biggest debt first will drain you and lead to disappointment. Do yourself a favour and use the debt snowball then get ready to serve notice on your bank managers patronising comments and a lifetime of debt.

Article written by James.