Reviewing the debt snowball approach

A research study conducted by Forrester Consulting in 2021 reveals that 70 percent of Filipino consumers are struggling with debt. This percentage is the highest recorded percentage across citizens of nine countries included in the study.

One such approach is the popular “debt snowball” approach. An individual must take stock of what he or she owes. One should list down all loans from smallest to largest in terms of value. Once the list is completed, the smallest loan gets paid in full first. Minimum payments are done on the other loans. Once the smallest loan is fully paid, the next smallest loan then gets fully paid. Ultimately, the largest loan is the last to be paid.

An advantage of the “debt snowball” approach is that it has a motivational component. As an individual is able to address the smallest debts first, feelings of accomplishment and satisfaction are generated. Managing debt will not be an abstract concept. As the smallest loans are paid in full and assuming that the succeeding loans have relatively low interest rates, the financial capability to settle bigger loans is enhanced because money gets freed up and money builds up. Resources can be sufficient to address debt.

A disadvantage of the “debt snowball” approach is that it can lead to a longer payment period before all debts are settled. This is because the balance of the bigger loans will just keep accruing if they are not settled. Having a longer debt payment journey will prove to be a test of resilience for the individual.

Source: Loan Digest (loandigest.net)

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