Since the MCOs were put in place in Malaysia last year, Azman, like most Malaysians, has been spending more time at home. So, on top of working from home at his current job, he decided to try to make extra income by baking and selling cakes.

After a few months of selling cakes, he found that he was making an additional RM1,000 a month. He decided to use the extra money to pay more towards his loan instalments to settle his debts faster.

He decided to look at the debt snowball method to see if it was a good way for him to tackle his debt.

But what exactly is the debt snowball method and how does it work?

What is the debt snowball method?

The debt snowball method is a way to pay off your debts faster by making extra payments on your loans one by one, starting with the loan which has the smallest repayment balance.

Once you’ve paid off this loan, you’d move on to paying off your loan with the next smallest repayment balance and keep going until you’ve paid off all your loans.

Depending on how much extra and how often you pay, you could end up paying your loans off in full faster than your agreed loan tenure.

The idea behind this method is that once you start paying off your debts, you get motivated to pay off your other loans.

By clearing your debts one by one, you’ll also have less loans to pay for. So, you’ll have extra money to make larger repayments towards your other outstanding loans.

But remember, while you’re paying extra for your loan with the smallest balance one by one, make sure you continue paying at least the minimum repayments for all your other loans. If you miss any payments, you could end up paying more interest!

How do you use the debt snowball method?

Now that you know what the debt snowball method is, here’s how you can use it to clear off your loans:

First, make a list of all your loans and the repayments for each loan.
Put the loans in order of the smallest loan balance all the way to the biggest loan balance.
Once you’ve identified the loan with the smallest repayment balance, calculate how much extra money you can afford to pay on top of your monthly payment for that loan. Depending on what you can afford, you can make the additional payments regularly or whenever you have extra cash.
Now, you can start by paying more towards your loan with the smallest balance. Keep paying the extra amount towards your loan until you’ve paid it off in full.
Once you’ve paid off that loan, you can move on to the next loan on your list.
Repeat steps 2-5 until you’ve paid off all your loans!

Should you use the debt snowball method to pay off your loans?

Before you decide if you should use the debt snowball method to pay off your loans, here are some things you need to know:

Pros

Cons

Build motivation: Once you start clearing off your loans one by one, you’d probably be more motivated to continue paying off all your loans until you’re debt-free.

Simple to do: You just need to list down all your loans in order of the smallest to biggest repayment balances and start paying them off!

You may pay more interest for loans with larger balances and higher interest rates: Because you’re tackling loans one by one based on the smallest loan balance, your credit card loan might not be your smallest loan. Until your snowball reaches your credit card balance, you might be only paying the minimum balance for your credit card. In this case, you’ll be charged more interest for the unpaid balance on your credit card until you start tackling your credit card debt.

So is this the right method for you?

If your credit card loan, which usually charges high interest on your unpaid balance; is your smallest loan, this method could be good for you.

But if it’s not your smallest loan, and you’re not paying it off in full every month, you’ll end up paying more interest. So, the snowball method may not work for you.

Here’s an example of how that would look like:

Type of Loan	Loan Balance	Interest Rate Rer Year
Credit Card	RM5,000.00	15%
Personal Loan	RM10,000.00	5%
Car Loan	RM15,000.00	4%

For the example above, since the credit card loan, with the highest interest rate is the smallest, the debt snowball could be a good method to use.

Before deciding to use this method, remember these 3 things:

Check if you can afford the extra repayments – If you can’t afford to pay extra on your loans, stick to your regular monthly repayments.
Make sure your loans that charge larger interest on unpaid balances, like credit cards, have smaller balances so you can tackle this debt earlier in your snowball.
You still have to repay your other loans every month, so don’t skip any payments.

If you want to learn more about some common loans you may have like personal loans or credit cards, read one of our guides.

Or, if you’re trying to figure out how much your total loan repayment would be for your personal loans, try our Total Repayment Calculator.

Related links:

Credit Cards 101

Monthly Repayment Calculator

Personal Loans