Lata works at a garment shop but always wanted to open up her own boutique. She decided to take a loan to set up her business. She was able to make a good profit during the last wedding season and plans to pay off her loan.

In her pursuit of a practical solution, she discovered the debt snowball method to handle her debts with a better strategy. Using this method, she found the fastest way to clear her debts by understanding which loan to clear off first.

What exactly is the debt snowball method and how does it work?

Using this method, once you’ve paid off the smallest repayment balance loan, you’d move on to paying off your loan with the next smallest repayment balance and keep going until you’ve paid off all your loans.

It is immensely motivating to pay off a debt, be it big or small. Tiny rewards help increase your drive and motivation over time to help overcome the big challenge.

Depending on how much more and how often you pay, you might end up paying your debt off in full, faster than your agreed loan tenure. As a result, you end up freeing some of your money to make larger repayments on your other debt. 

Small efforts make a huge difference. Remember Guru’s climb to the top? From a small vendor to India’s biggest industrialist! His company went through a crisis many times but he did not lose heart. It’s not easy but consistency helps. 

How do you use the debt snowball method?

Now that you know what the debt snowball method is, here’s how you can use it to clear off your loans: 

Did you know?

According to a report, the number of women who borrow money is growing at 19%, as compared to Men (at 14% CAGR).

In 2020-23 itself, over 5 crore women took out a loan to meet their financial goals. Studies also show women are less likely to default and usually repay their loans back in time. 

One of the top reasons was to start or expand their business. This shows that more and more women are becoming entrepreneurs. 

Take Sri Devi’s character in English Vinglish. She runs a home-based ladoo business. If you are like her, you could probably start your own venture with a little help from the bank!

Should you use the debt snowball method to pay off your loans?

Before you decide if you should use the debt snowball method to pay off your loans, here are some things you need to know:

💡 As the name suggests, a snowball effect is achieved in your finances by paying off the smaller debt first and freeing your money. All this extra money can come together to form a larger fund, a larger snowball that will help you repay the biggest loan at the end.

So is this the right method for you?

If your Mudra Loan, which usually charges high interest on your unpaid balance, is your smallest loan, this method could be good for you.

But if it’s not your smallest loan, and you’re not paying it off in full every month, you’ll end up paying more interest. So, the snowball method may not work for you. 

Here’s an example of how that would look like: 

Use our Personal Loan EMI Calculator to calculate your personal loans

In the above example, since the repayment amount of Mudra loan is the smallest, the debt snowball could be a good method to use.

Things to remember before deciding to use this method

✅Check if you can afford the extra repayments – If you can’t afford to pay extra on your loans, stick to your regular monthly repayments. 

✅ If the loan that charges a higher interest on the unpaid balance (like Mudra Loan) has a  smaller repayment amount, you should tackle this debt earlier in your snowball.

✅You still have to repay your other loans every month, so don’t skip any payments.

❓Still feel that this method is not the right fit for you? Explore the Debt Avalanche Method (link) instead – a strategy that prioritises tackling debts with the highest interest rates first, enabling you to save on interest costs and accelerate your debt repayment journey.