With the snowball method, you start with the smallest loan amount first and finish with the largest. By choosing this method, you are motivated by seeing that one loan after another disappears faster.
In some cases, you find yourself in a situation where it is not possible to refinance, and then you have to think about alternatives. There are many ways to pay off loans, and very often it turns out that the most common way is often not the best.
As a rule, the repayment plan that the banks have set is used . If you do, it’s hard to reach your goal and hard to keep up your motivation.
The snowball method is a way of paying off debt that proves to be both faster and more motivating. Through all my years in the banking world, I have seen several examples of customers being able to pay off debts they didn’t think possible by doing it this way.
It is easy to think that the snowball method seems like a bad solution for paying off debt . Would it not be a better solution to start with the most expensive loan, i.e. the one with the highest interest rate?
Well, if you do that, it will actually be the most reasonable overall, but the problem with starting repayments on the loan with the highest interest rate is that it is so terribly easy to become unmotivated.
The reason for this is that it takes an awfully long time to progress if the loan that is number 1 is NOK. 450.000,- . Then it is much more motivating to perhaps manage to get rid of 4 loans in a short time
To use the snowball method, you must do the following:
- Sort all your debt items according to the size of the loan. Leave the smallest loan at the top as number 1.
- Pay only the minimum amount on debt item 2 and below.
- Pay as much as you can on the debt item listed as number 1
- When you have paid off the loan listed as number 1, you have freed up e.g. NOK 500.- per months You can use this NOK 500 as an additional payment on the loan that now moves up to 1st place on your list. You must still pay as much as you can only manage on loan number 1, and only the minimum amount on loan number 2, etc. Now you suddenly have one less loan to deal with.