Are Installment Loans A Better Choice When Borrowing Money?
First and Foremost
Before you sign the dotted line to get a loan make sure you will be able to make the payment when it is due. That last thing you want to do is borrow money knowing you will have difficulty repaying it in full when the due date arrives. For example if you are considering a payday loan which will be due the very next time you get paid but your budget is currently so tight that you already know repaying it will be difficult then you may want to take some time to look at more options.
Short Term Installment Loans
A short term installment loan may be similar to a payday loan as it likely will have very high interest rates associated with it. In addition it may be available to those wanting to borrow money from lenders who loan money to people who have bad credit. You may find lenders offering installment loans for 30 days, 60 days, and 90 days, for example.
Is a 30 Day Installment Loan a Better Choice Than a More Traditional Payday Loan?
In terms of the total amount of interest you will pay over the life of the loan, probably not. Meaning you may pay more money to cover the interest expense. The rate may be lower but since you are paying over a longer period of time the total amount you will pay may be higher. You need to be careful here too if you plan to pay it off sooner as it might have a penalty or additional fees for prepayment which may negate any benefit of paying it off sooner.
Longer Term Installment Loans – Are They A Better Option?
Well it depends. First of all you will most likely pay less in total interest charges over the life of the loan if the term or length of loan is shorter for repayment. However, a very significant factor in this determination is the interest rate applied to the loan. If a longer term loan has a smaller interest rate than a short term loan then at some point, at least theoretically, they will switch or swap in total interest charges due or paid during a certain period of time.
For example if you borrowed money that you had to repay in one week that had a really high interest rate compared to if you were to borrow money with a lower interest rate that you repaid over a twelve month period, then during that first week total interest charges due or paid over the life of the loan would be less on the short term loan. However over the total life of the twelve month loan you would likely pay more in total interest charges due or paid compared to the short term loan. Of course it all depends on the rate.
How Much Can You Afford To Repay?
If you will only be able to repay a small amount each month or period then an installment loan may be your only option. This is where it can get a little tricky because you have to make sure your payment is not too high so that you have a tough time trying to make it each period, but you don’t want it too low where it is extended too far out causing you to pay a significant amount of money in interest charges. Pay very close attention to the rate and make sure to read and fully understand all of the documentation before signing it and accepting the cash.
Digging into the Details
If things get better for you financially would you be able to pay the loan off without any sort of prepayment penalty? Ideally that is what you want (to pay it off sooner if possible) and then you could also actively try to earn more money to get it paid back quicker.
Make sure to read the details of the loan with respect to what actions will be taken if you are not able to make a required payment when is due. Are you going to get charged a late fee or will your rate increase? Is the lender going to start collections or give you some sort of a grace period? Does the lender offer a way to extend the loan even longer? If they do, should you? It is going to cost you.