Definition
Debt Snowball
The debt snowball is a repayment strategy where you clear your smallest debt first while paying minimums on the rest, then roll that payment into the next-smallest debt, and so on.
Its appeal is psychological: knocking out a small loan quickly delivers an early 'win' that builds motivation and momentum, like a snowball growing as it rolls. Each cleared debt frees up its payment to attack the next one, accelerating progress over time.
The trade-off is cost — it ignores interest rates, so you may pay more total interest than with the debt avalanche method, which targets the highest-rate debt first. The snowball is often the better choice for people who need motivation to stay the course, since the method you actually stick with beats the mathematically optimal one you abandon.
Related terms
- Debt-to-Income Ratio (Individuals)For individuals, the debt-to-income ratio is the share of your monthly income that goes toward repaying debts such as EMIs and credit-card dues.
- Debt AvalancheThe debt avalanche is a repayment strategy where you attack the debt with the highest interest rate first, while paying minimums on the others, to minimise total interest paid.
- Debt ConsolidationDebt consolidation is combining several debts into a single new loan, ideally at a lower interest rate, to simplify repayment and cut interest costs.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.