Debt stacking vs snowball: How to come out of loans using Snowball or Stacking Methods?, Now a days it’s absolute that living without a loan is almost a rare thing. Each one of us whether salaried employee or self-employed person might have trapped in a variety of loans depends upon the activity of the individual. I found that many people have more than one kind of loan except in some cases. So, it is very essential know how to come out of these loans wisely so that your creditworthiness will not be affected. If you have multiple loans then you may doubt “which loans should I pay off first?”, Know What is Stack Method and Also Check What is snowball, Find Difference between Debt Stacking and Snowball Method.
Debt stacking vs snowball
There are 2 popular methods of discharging your loans in case of having multiple loans. They are :
- Debt Stacking Method
- Debt Snowball Method
1. Debt Stacking Method
This is a method of honoring your debts in such a way that the debt with the highest interest rate is paid off first. Here the main theme is rate of interest that each loan carries. This is a popular method of paying off of your debts. In this method first of all you have prioritize all your loans based on the rate of interest. The order should be the debts carrying higher interest rate should come first. And it is ensured that the debts with higher interest rate will be discharged first and so on.
At the same this method suggest you to pay down some minimum amount towards the all the loans. Since the high-interest rate debts are paid off first, the loans having high principal amount with low interest rate are ignored to pay at last.
This may give you confidence that you are getting benefited as the loan with the high cost is paid of early so the overall cost of your debts is reduced but what about the loans with low interest rates having high amount of principal. This method benefits you in the long run.
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For example:
If you have multiple loans which carry different interest rates which are to be repaid within a period of 5 years and currently you have Rs 50,000 to pay off the loans then as per the debt stacking method it will be as following:
| Debt stacking method | |||
| Debt | Balance | Interest% | Minimum payment |
| Agriculture Loan | 30,000 | 7 | 7,500 |
| Personal Loan | 25,000 | 8 | 6,250 |
| Car Loan | 28,000 | 10 | 7,000 |
| Credit Card -1 | 15,000 | 11 | 3,750 |
| Credit Card -2 | 25,000 | 12 | 6,250+19,250 |
| 24,500 |
2. Debt Snowball Method
Debt snowball method of paying off your debts which suggest you to pay off your loans with having small balances first alongside of allocating some minimum amount to pay off the larger debts. Once the small debts is paid off the concentration should be on the debt which is slightly higher than the first one. In this method first of all you should prioritize the debts based on the amount of principal. Here rate of interest does not play any role in deciding the order of debts to discharge.
First step in his method is listing out all the loans from smallest to highest based on the principal amount. Later ensure that some minimum amount is paid off towards every loan you have. Next arrive at the amount you have still to pay off the debts. Then use this amount to pay off the lowest principal loan completely. Repeat this task until all your debts get paid off.
This may seem like you become free of lower principal loans so quickly but the loans which results in high cost of debts are still there. This can be said as the biggest demerit of this method.
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Example:
If you have multiple loans which carry different interest rates which are to be repaid within a period of 5 years and currently you have Rs 50,000 to pay off the loans then as per debt snowball method it will be as following:
| Debt Snowball Method | |||
| Debt | Balance | Interest% | Minimum payment |
| Agriculture Loan | 30,000 | 7 | 7500+19250 |
| Personal Loan | 25,000 | 8 | 6,250 |
| Car Loan | 28,000 | 10 | 7,000 |
| Credit Card -1 | 15,000 | 11 | 3,750 |
| Credit Card -2 | 25,000 | 12 | 6,250 |
Decision Making
Both of the methods are very subjective as one concentrates on rate of interest while the other focuses on amount of principal. But simply following either of this would not be better to get fair results all the way. So one should plan that rate of interest and principal both are considered in paying off the debts so that optimum benefits can be derived.
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Categories: Banking
Source: bank.newstars.edu.vn
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