Many of us find ourselves at a crossroads when it comes to choosing and managing loans. Should we go for loans with smaller monthly repayments or those with lower interest costs?
On one hand, smaller monthly loan repayments are easier to manage, especially for those with limited income. On the other, lower interest costs give you massive savings in the long run.
Let’s go over each one’s goods and not-so-goods to find out which of the two works best for you.
Small Monthly Repayments
Choosing loans with smaller monthly repayments means the loan is spread over a longer period. This can have benefits and drawbacks that can affect your overall financial health.
The Benefits
Smaller monthly repayments benefits families or individuals with irregular and low-income sources compared to low-interest rate loans.
Knowing you’re paying a fixed monthly amount gives you greater control over your finances. This allows you to anticipate your monthly repayments and expenses and plan for them accordingly.
Smaller repayments also often come with more flexible repayment options. If your financial situation improves, you may have the option to make additional payments to get out of debt faster. That is, if the loan terms indicate there are no pre-payment fines. Read the loan agreement’s fine print and ask questions when needed.
The Drawbacks
Now for the downsides. One of its significant disadvantages is that they usually result in higher total interest costs over the loan’s full term.
Think about it. You are spreading the repayment over a longer period, which means the interest will stack up. This makes the loan more expensive in the long run despite the more affordable monthly dues.
Smaller payments also mean you are committed to the loan for a fixed, longer period, making flexibility a challenge. This limits your ability to take on new financial opportunities or obligations.
Low-Interest Costs
On the other hand, choosing a loan with low-interest costs also has its advantages and disadvantages. This approach minimizes the total amount of interest paid over the loan’s full term.
The Advantages
Taking out low-interest loans enables you to pay less in interest over time, allowing you to save money in the long run. These savings can be significant, especially for large loans, such as mortgages or car loans.
Think about it: At the time of this writing, Singapore’s average 30-year fixed-rate mortgage rate is 2.4%, and HDB rates are 2.45%. Lower interest rates on housing loans could save you thousands of dollars over a 30-year period. That’s something to give careful thought to.
Another typical benefit of going with lower interest rates is they often come with shorter repayment terms. This means you can pay off the loan faster, freeing up your finances for other purposes sooner.
Also, by saving money on interest, you can divert more funds towards investments, financial priorities, and other equally important expenses. This approach can help you grow your financial portfolio and improve your financial health.
The Disadvantages
Now for the setbacks. One of the challenges of taking out loans with low-interest is that they often come with higher monthly payments. Since most low-interest loans have shorter repayment terms, lenders typically set higher monthly dues to cover the entire debt in as short a time as possible.
Lastly, lower-interest loans with higher payments may not be a good idea for folks who earn below-average income. The main reason is that lenders often require proof of higher income and financial stability from potential borrowers. The criteria they set automatically leave out a huge percentage of borrowers from taking advantage of the lower interest rates.
Responsible Borrowing: Making the Right Choice
Ultimately, deciding between lower monthly payments and interest rates depends on your situation and priorities.
To help evaluate which option works best for you, go over the following questions and answer them as honestly as you can:
- What are your current income and expenses?
- How comfortable are you with potential fluctuations in interest rates?
- What are your other financial goals, such as retirement savings or children’s education?
- Do you prioritize long-term savings over short-term comfort?
- How quickly do you want to become debt-free?
By carefully considering these factors, you can make an informed decision that aligns with your financial goals and well-being. Whether you borrow from banks, long term money lenders, or trusted individuals, arming yourself with the right information will point you in the right direction.
To make it more practical, you can use follow the tips below:
Tip 1: Always Perform Due Diligence Before agreeing to any loan or signing any document, you must do your homework. This includes comparing loan options, calculating your total expenses over the loan’s duration (factoring in inflation), and consulting with experts, among others. Doing this allows you to make better borrowing decisions that will not leave you neck-deep in debt.
Tip 2: Understand the Loan Terms Many of us aren’t as patient when it comes to reading contracts and legally binding agreements. Most of us just skim through the documents without fully understanding what they say.
As a borrower, never sign the dotted line unless you fully understand the loan agreement. Carefully go over the document, especially the fine print, and ask the lender questions for clarification.
Tip 3: Assess Your Capability to Repay the Loan Many of us think that loans are a way to get free money. While it does amplify your spending powers, understand that you will have to repay the borrowed amount regularly for a specific period.
That said, you must have an income that will allow you to comfortably repay the loan without compromising your other priorities. That said, having an emergency fund is crucial to acquiring a loan. We never know what tomorrow may bring and an emergency fund prepares us for the unexpected and allows us to still settle our monthly repayments while we recover from whatever curve ball hit us.
Wrapping It Up
Ultimately, the choice between small monthly repayments and low-interest costs depends on your financial situation and your goals and preferences.
Evaluate your financial situation and consider consulting with a financial advisor to make the best decision you won’t regret later on. Regardless of your choice, making an informed choice can significantly impact your financial well-being.
