Time is our most precious resource, our only commodity and we have a modicum of control over it. It’s something we cannot get more of so those who want to become smart with their personal finances should understand how to leverage time to be on their side when needed.
This needs to be looked at in more detail regarding the other side of finances. This being when you’re considering taking out a personal loan and similar types of debts. You want to be in control of your own financial timetables and make sure that whatever route you take you will be able to meet your short and long term financial goals.
Parvesh Benning, who works at Protect Your Wealth in Ontario as a Financial Advisor, said, “Personal loans are directly impacted when it comes to time. Essentially your loan payments are built from such a timetable and how long it will take to completely pay off that debt. This is known as the amortization period, and the longer this period is, the more overall interest you, as the borrower, will have to pay.”
The question then arises whether the focus should be on these repayment schedules or the loan’s overall interest. In the end, it always comes down to the individual and their own financial situation.
Benning added, “A borrower needs to ask themselves what is more critical to them. Is it proper cash flow now, or the total cost to borrow the funds in the end? A borrower could actually go for a larger rate and longer repayment plan if that’s what may be best for their current finances and free cash flow. Or the borrower could look towards paying off as fast as possible, squeezing their cash flow but paying the least amount for it.”
Here are 5 things we’ll look at to help us better understand a repayment plan that’s longer
Ok, you’ve decided to stay the course and take out that personal loan, but make sure you understand all the key components of it, especially the loan repayment table and where to save yourself the most money and, more importantly, time.
Make sure the repayment isn’t too long
Remember that the longer you’re paying the debt means the higher the interest cost you will have. Even if you have a good rate it’s consistent payments and costs for the duration of the loan.
Steve Replin, who founded Replin Law Group LLC, which is based in Denver, Colorado, had this to say, “If you end up having a really long-term personal loan, it may have lenders possibly look over and re-evaluate the interest rates from time to time, or even on a consistent and continuous basis. You want to avoid that, which comes with knowing how long to stretch out your personal loan from the beginning.”
Always go rate shopping
You don’t need to stick with one type of lender or provider so go out there and see what’s available. You’re looking for the right balance between what kind of interest rate you will pay over the entire timeframe of the personal loan itself.
Replin added, “If you see loans that have a few years apart in terms of repayment terms, but the interest rates are similar, go for the longer one. You’ll have better cash flow, but if you find a windfall, you can always repay the personal loan sooner.”
He believes those loans that are at the two-year mark or less come up too quickly and believes those longer-term loans provide a calmer sense of repayment and financial management.
“You borrow the funds, and it feels like you owe back everything as soon as the loan is approved with those shorter-term loans.” He added.
Your credit score could benefit from a longer repayment strategy
As long as you make all the loan payments back on time your credit score will also improve in the long term.
Lyle Solomon, who works for the Oak View Law Group out of Rocklin, California, as an attorney said this, “When you make those on-time payments your credit score goes up. It’s also a different type of loan than a credit card and is known as an installment loan helping to show you have a variety of healthy debt.”
Be cautious with your loan consumption
One major negative is your high interest and long repayment schedule. That means a higher overall cost to your loan.
Simon Ikuseru, who is a CPA and also founded walletbliss.com, did say, “Don’t get trapped in the worst con when it comes to personal loans and taking on a large amount of debt to buy something more expensive. This is typically seen when you’re looking for a higher-priced car than originally budgeted. Still, you’ve expanded the repayment terms to the longest possible, so the monthly payments seem affordable.”
Lower payments are becoming the preferred method for many
More people are looking for those lower payments to ensure a healthy cash flow.
Ikuseru added, “We’re looking at 72 months for the average car loan based on recent reports. This could mean that those borrowing are looking for the smallest monthly payment and not completely factoring in the rates or overall length of the loans.
In the end
There’s really no best option out there, as the best choice comes down to what your general personal and unique situation looks like. While a longer time frame could be stressful as it adds additional life and time to a debt owed, it could become more manageable with the lower repayments until you’re in a better financial situation. The funds could make a huge difference today than having to pay off extra interest in the long term.
Solomon also added that “Look at all angles and see where interest savings are better than what your monthly debts are and vice versa. Take the hit to your credit score short term to ensure a strong financial health in the long run.