There are many different types of loans and they differ in a variety of ways. One difference between loans is the repayment terms. Some loans require you to repay the whole loan in one instalment whereas most loans will expect you to repay in smaller instalments over a period of months or even years. There are advantages and disadvantages to both methods and it is worth thinking about these so that you can decide which will suit you the best.
Cost of the Loan
Usually the loan costs increase the longer you hold the loan. This is because loan interest tends to be added on daily and so if you have the loan for more days then you will pay more interest. This is relevant to choosing between repaying in instalments or in a lump sum because if you repay in one lump sum, you will pay back the loan much more quickly and therefore it will usually be cheaper. It is worth calculating this though, just to be sure and it is god to know how much the loan will cost you anyway. If you are taking out a payday loan, it will have a calculator on the website which will let you know how much the loan will cost in total when you put in the amount that you want to borrow and when you will be repaying it. This is not always so obvious with other types of loans and so you may need to telephone the customer services to ask them the total repayment amount or the total cost of the loan, whichever you are comparing. You can calculate it, but this can be quite tricky and so it is easier to get the lender to do this for you. If interest rates were the same, then it would be obvious that taking longer to repay it would cost more. However, interest rates will vary between different loans and therefore a comparison is not that easy. You may be tempted to think that the lower interest rate will be the cheapest, but if you are paying back over a longer period, even at a lower rate, you could end up repaying more in interest than if you repay in a lump sum at a higher interest rate. There may also be other charges and fees which you pay separately to the interest which will change the cost and if you forget to add those into your calculations or you are not aware of them so do not put them in, it could mean that you get an incorrect answer. Whereas if you phone up and explain how much you want to borrow and how long for and ask how much in total you will have to repay, you should be able to get a straight answer that you can use for comparing.
Size of the Repayment
If you repay in instalments, it is likely that you will repay smaller amounts than if you repay in a lump sum. This could make a big difference to how you cope with that repayment and how you cope afterwards. Paying back a big lump sum may mean that you suddenly have a significant chunk of money removed from your bank account meaning that you may find it hard to cover the rest of your bills or to buy essentials such as food for the rest of the month. However, if you repay in smaller instalments, you will be spreading the cost for longer meaning that it will be easier for you to manage the repayments as well as the rest of your expenses.
If you feel that you could easily manage a lump sum repayment this may not be an issue for you, but it is important to think about how you normally manage. Consider whether you tend to struggle to pay everything each month or whether you have spare money available. If you do have spare money, would it normally be enough to cover a large repayment or do you feel that you would struggle? If you are not sure, then look back at past bank statements to see how you have managed in the last few months; look at how much you had left at the end of the month and see whether it would have been enough to cover a loan repayment.
Stress of the Loan
It is also important to think about how stressful you may find a loan. Some people feel that just being in debt is a big burden and they want to get out of it as soon as possible. This can mean that paying it off more quickly, could be the best option as the stress will disappear more quickly. However, if this then causes you to struggle financially, then it could create even more stress.
If you have had a loan before you will be able to know how much stress a loan is likely to cause you and compare this by stress caused by having to cope with less money. You will be likely to know how much stress you feel when struggling to make ends meet and this may be less than that caused by having a loan or it could be more. Only you will be able to be the judge of this. It can be difficult to know for sure, but you should be able to use past experience as a guide and have some sort of idea as to which situation will be the easiest for you to be able to cope with.
There are lots of things to consider when you are looking at borrowing money and repayments is just one of them. It is an important factor though and well worth considering. You need to consider the cost differences between paying back in one or several instalments as well as how well you will be able to cope with the amount you have to repay. You also should think about how these will impact your stress levels.