The loan repayment period is one of the things that people overlook when choosing the right one to use for debt consolidation. Most people focus on the interest rate and monthly payments. Little do they know, the repayment period can affect both of these.
In our society, the use of credit is widely accepted. You can even say that it is encouraged because it is very easy to apply and open a credit account. While credit increases the purchasing power of consumers, it can compromise their personal net worth. In fact, reports reveal that consumers spend around 10% of their income every month on debts that are not related to mortgage. These include credit cards, personal loans, auto loans, and student loans.
The truth is, using debt can be very beneficial – you just have to understand it thoroughly so you can use it to your advantage. To do that, you have to make sure that you consider all the features of the loan that you will get. That includes the loan repayment period.
Two options for loan repayment periods
There are two options for the repayment period of your loan.
Long repayment period
This basically means it will take you years to pay this off. These include home loans, student loans, etc. Usually, these are offered at a lower interest rate. The longer repayment period means the interest will take effect on more payments. Over the course of the loan payments, you will realize that the low-interest amount will still add up to be quite significant.
Since you have a lower interest and the payments are spread over a longer payment period, you can expect your monthly payments to be smaller. For some people, this can be appealing because it keeps their finances from feeling too strained. However, it also means you are stuck in debt for a long time. That can keep you from enjoying financial freedom.
Short repayment period
The other loan repayment period option is the opposite of the first. It is the short repayment period. That means this is a loan that you will borrow and pay off within a few months. Since the payments will be fewer, the creditor or lender will give you a higher interest rate – so as not to compromise their profit from the loan. However, this will probably still be cheaper compared to having a longer repayment period – which is the main reason why you might want to opt for a shorter debt consolidation loan repayment period.
Take note that going for a shorter repayment period can still be applied to all types of debt. For instance, you can opt for a shorter 15-year mortgage instead of a 30-year loan. Or instead of getting a car loan that is payable in 36 months, you get one that should be paid in 12 months.
You might be wondering, with what you know of both long and short-term loans, why is it wiser to opt for the latter?
Pros and cons of a shorter repayment period
To be able to make a smart decision about the loan repayment period, here are the advantages and disadvantages of getting a shorter term for your loan.
There are two important reasons why you should opt for a shorter loan repayment period.
First of all, it will help you enjoy debt freedom a lot faster. It may not mean so much to you when you are young but if you are nearing retirement, being debt free will matter more. According to statistics, more people are retiring with debt and it compromises their cash flow during retirement. At this point, retirees have a couple of options. They either live a very restricted lifestyle or they can choose to go back to work. Both of these options can put a damper on what should have been a dream retirement life. If you want to be debt free because of your upcoming retirement, you might want to choose a shorter loan.
Another advantage is saving money. The shorter the payment period, the less interest you have to pay – even if the interest rate is higher than a long-term loan. You will be saving money on the overall payment on the loan.
While the faster debt relief and savings are appealing, it has one disadvantage. You need to make higher monthly payments. After all, you are compressing the loan payments within a shorter time. That will naturally increase your monthly contributions.
If you think that you have the finances to pay a higher amount, then go for the shorter loan repayment period. This is really beneficial for those with a lot of credit card debts. The high-interest rate of the credit card will make you lose a lot of money. If you want to save, you need to consolidate credit card debt with a shorter loan. This will help you save a lot of money and get you to debt freedom faster.