Snowball strategy

Paying off debt is as much a behavioural problem as an arithmetic one. A borrower with many loans who never sees one of them close can lose heart and stop trying.

The snowball strategy is built for that borrower. It focuses on the amount of each loan: start with the lowest debt amount, clear it, then move to the next higher amount outstanding. Interest rate does not come into the decision.

The name describes the second half of the method. When the first loan is paid off, the amount that was going to it is rolled on to the next loan's repayment, so the payment keeps gaining size, like a snowball rolling downhill, and the next higher debt becomes easier to pay. The workbook describes it as often used as a motivational strategy, useful to achieve a sense of success when quite a few loans remain.

The workbook example — credit card Rs 30,000 at 42%, personal loan Rs 1.2 lakh at 21%, car loan Rs 1 lakh at 12%, housing loan Rs 15 lakh at 8%.

Snowball order by amount: credit card (Rs 30,000) → car loan (Rs 1 lakh) → personal loan (Rs 1.2 lakh) → housing loan (Rs 15 lakh).

The cost of the method. Because rates are ignored, a small loan at a low rate is repaid first while a higher-cost loan stays open. The exact mix of amounts and rates can leave the interest pressure high. For this very example the workbook says snowball is not preferred — it puts the 12% car loan ahead of the 21% personal loan.

Blizzard is the workbook's fix. It starts with snowball (smallest debt first) for the motivational boost, then switches to avalanche (highest rate first). In the example: credit card first as the smallest, then the personal loan as now the highest rate, then the car loan and the housing loan. The method is meant to avoid ending up holding the highest-rate debt while paying off the rest.

To apply any of the three, the exact outstanding amounts and the rates on each loan must be available.

Illustrative figures.

Sandeep has three loans and can commit Rs 25,000 a month to debt repayment beyond his home loan EMI.

Minimums total Rs 19,000, leaving Rs 6,000 extra each month.

Snowball order: consumer durable loan (Rs 36,000), then two-wheeler loan (Rs 60,000), then personal loan (Rs 2,40,000).

• Months 1 onward: Rs 6,000 + Rs 6,000 minimum = Rs 12,000 a month goes to the Rs 36,000 loan. Ignoring interest for simplicity, it closes in about 3 months.
• Its Rs 12,000 now rolls on: Rs 12,000 + Rs 4,000 minimum = Rs 16,000 a month to the two-wheeler loan, which closes a few months later.
• Then Rs 16,000 + Rs 9,000 = Rs 25,000 a month goes to the personal loan.

That growing payment — Rs 12,000, then Rs 16,000, then Rs 25,000 — is the snowball. Two loans close early, which is the motivation the workbook describes.

The price: for those months the 18% personal loan, the costliest and largest, received only its minimum. An avalanche borrower would have sent the extra Rs 6,000 there from month 1. A blizzard borrower would close the small consumer loan first for the early win, then turn to the 18% loan ahead of the 11% two-wheeler loan.

Chapter 4 (Debt Management and Loans), section 4.15.2, between avalanche (4.15.1) and blizzard (4.15.3). Questions give a set of loans and ask for the order under a named strategy, or ask which strategy ignores interest rates and which is primarily motivational.

• Snowball orders by amount, smallest first. Interest rate plays no part.
• Its benefit is motivational, not mathematical. The workbook calls it a motivational strategy and says it is not preferred for its own example.
• The "snowball" is the rolled-over payment, not compounding interest.
• Blizzard = snowball first, then avalanche. In the workbook example it clears the card, then the personal loan, then the car loan and housing loan.
• When the smallest loan is also the costliest, snowball and avalanche agree on the first step — as with the Rs 30,000 card at 42% in the workbook.