Commercial Collections Blog

The Snowball Debt Plan: What it Is and How to Use It

Most people who are trying to pay off debts are faced with the difficult question of prioritization. Yes, you can continue making the minimum monthly payments for years, but many want to get out of the debt hole as soon as possible.


And as lenders or businesses to whom they owe money, it’s in your best interest to want them to get out of debt quickly, too.

By equipping your debtors with tools to help them pay off debts faster, you are not only ensuring a more positive relationship between the two parties, but you are also getting your own money back quicker.

The Debt Avalanche Plan

Many people attempt what’s known as a debt avalanche. At first glance, this method seems like the best solution. It involves paying off debts in order of the level of interest they demand – the highest-interest loans first, working down toward the one with the lowest interest level. While this method does save the debtor money by cutting down the amount of interest they pay over the long run, it can also be difficult to keep themselves motivated and energized. It’s a long, hard-fought victory by the time they pay off that first (usually large) loan.

And if you aren’t the holder of that highest-interest debt, you may be waiting a while to regain your money.

But there’s another option. The debt snowball plan works differently than the debt avalanche and can help you get your money faster, and your debtors get out of debt. This program, unlike the debt avalanche, is self-rewarding and easier to persevere with, simply because it offers more gratification than the avalanche.

Read on to learn more about starting a debt snowball plan and how it works.

The Debt Snowball Plan

A debt snowball plan helps the debtor focus on paying off the smallest debt first. Though in theory, the debt avalanche is a better option – saving money on interest – in reality, the debt snowball can be far more effective. There is something vastly more satisfying about paying off a debt in full, even a small one, rather than paying for months and months on a large one in order to avoid interest.

Many people find that a debt snowball is motivational to them and helps them get out of debt faster. Dedication is essential, of course, as it is with any debt-elimination system. The debt snowball is widely promoted by Dave Ramsey, known for his several bestselling books and popular radio show on financial management and getting out of debt.

So, here’s how the debt snowball works. The debtor tallies up and ranks all of their debts in order of size – with no regard for interest rate. For example:

Credit card #1: $750 at 13% interest with a monthly minimum payment of $30

Credit card #2: $1,000 at 18% interest with a monthly minimum payment of $50

Car loan: $5,000 at 5% over three years with a monthly minimum payment of $140

Student loans: $20,000 at 5% over 15 years with a monthly minimum payment of $120

In this situation, the first debt to tackle would be credit card #1, with a debt of $750. The debtor then begins making the minimum monthly payments on all debts except for the smallest. That one, they put all the extra money they can into. Even if it’s only an extra $50 a month, they’ll be able to pay it off much faster. Once that one is done, they move on to credit card #2, with a $1,000 debt. In addition to the $50 per month they’ve been paying, they can add the $80 a month they were paying on credit card #1. This continues until they get to their student loans, where they can start paying an additional $270 a month, bringing their total monthly payment on that to $390!

The feeling of victory that comes from knocking out each of the smaller debts serves as motivation to keep going. Like a snowball rolling downhill and growing with each turn, each paid-off debt frees up more money to throw at the next-largest one.

Debt Snowball: A Solution for You and Your Debtors!

Not only does the debt snowball work in favor of debtors, by helping them eliminate their debts, it also helps you as the one waiting for repayment. Consider offering this plan as a solution to your debtors, perhaps via an online resource or a worksheet you can hand out – it will help everyone reach a happy conclusion faster and more efficiently. This plan will benefit both sides and reduce the strain, both financial and mental, on both parties.