Debt Repayment: Snowball Method or Stacking Method

The advancement in technology and ease in availability has led to a surge in loan applications. While loans are a medium of purchasing something expensive that you don’t have enough funds for, opting for too many loans can result in a debt trap. In such scenarios, proper planning is required to come out, and choosing from the most appropriate debt repayment methods is a must.Let’s find out how these methods can help in coming out of a debt trap. However, before proceeding, here are a few steps you must take:

1. 1. Do not apply for fresh loans Once you have made up your mind to reduce the debt, the first thing to do is to stop going for new loans. You cannot add new debts when you are trying to come out of the existing ones. 2. Spend less The next step to take is reducing your spending and limiting them to necessary things – no splurging! If you spend more, how will you be able to clear your loan? 3. Earn more Build multiple sources of income to earn more. This will give you flexibility and relieve you from depending on just one source of income. 4. Don’t stop investing So not stop investing during the times of a debt trap. You must invest in long-term goals and never postpone them.

The most common repayment methods are the following:

• List down all your debts and pay the minimum amount due for all
• Calculate the total remaining amount that needs to be paid.
• Pay the minimum balance along with the additional amount towards the lowest loan.
• Once the first small loan is paid off, add the additional amount and the minimum due of the next loan to pay the next one.

1. Snowball method An oft-practiced debt reduction strategy, the snowball method is whereby the borrower who has more than one active loan account pays off the debt, starting with the smallest balances first and then going on larger debts. The steps involved in this method are:
2. This process helps you into smaller pieces and take up one piece at a time, the smallest being the first.
3. Debt-Stacking method Under the debt repayment methods, this method involves you to list down all debts basis the interest rates. After listing down the loans from highest interest rate to the lowest, concentrate on weeding out the highest interest rate loan first. However, paying the minimum amount due to other loans is a must. One by one, you then clear the remaining debts.

From the above-mentioned debt repayment methods, the best method is a blend of both as one focuses on principal, while the other concentrates on interest. Therefore, a middle path, where both get repaid, can be worked out.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.