The timeline for paying back your debt can affect your finances – Here’s why.
Personal loans have a detailed timeline in terms of repayment, and it is important that you follow that timeline to avoid overpaying in interest. You are able to decide on a payment schedule when you take out a personal loan, so if you think you can pay it off quickly, opt for a shorter repayment schedule.
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The amount of time that it takes for you to repay a lender after taking out a loan affects both the monthly payment and the total amount of interest that you will pay on that loan.
If you need an influx of cash right now, but feel confident you can repay it quickly, you can choose a shorter schedule. This will make your monthly payments higher, but will result in less interest paid over the life of the loan.
The opposite is also true – if you have low monthly payments, you will be paying more interest to the lender, as it is taking longer to pay them back. With longer repayment times also typically come higher interest rates.
For example, if you took out a $20,000 personal loan to use on house renovations and paid the loan back within three years with a 7% interest rate, you would pay a large $617.54 per month, but pay a total of $2,231.51 in interest.
In contrast, you could pay it back over 5 years at an 8% interest rate and you end up paying $4,331.67 in interest, but your payment each month would only be $405.53. This is a great example of how lower payments per month can result in much more money spent over time.
When deciding on a loan schedule, also look at penalties and other fees. Some lenders institute an early payment penalty, which is a fee that you have to pay if you are able to pay off your loan quicker than you anticipated. They do this to ensure they will get the interest that they are due.
It is so important to make sure you choose the best timeline with the information that you have.
The bottom line
The timeline in which you pay back your debt can affect your finances because of your monthly payment and interest. Although it might be more difficult to contribute more each month for a period of time to pay off your debts, it results in an overall cheaper loan than paying it off slowly.
Remember, when taking out loans, take out only what you need and repay it on time and as quickly as you can.