When it comes to footing the bill on larger expenses there are usually two routes that you can go: you can pay in a lump sum (one large payment) or in installments of payments (usually on a monthly basis.) Each has certain benefits and certain drawbacks. While they are available options for each person your own personal money situation will be the biggest determinant in whether or not you are choosing to pay off an expense as a lump sum or in smaller installations. But how do you know which makes the most sense for you?
When These Payments Apply
For the most part, lump sum vs. installment payments are restricted to larger sums of borrowed money. In other words the kinds of payments that charge an interest rate. For example, something like your monthly electricity bill or a wifi payment is just that, monthly. These are service costs- not the type of costs that come with an interest rate- which means you aren’t going to be paying any additional cost on an interest rate. In addition, you aren’t paying for services in lump sums. They are nearly always month-to-month.
Lump sums and installment payments do come into play when you’re borrowing money. For example a car loan, home loan, and with credit card payments. Credit cards are a bit different because interest rates don’t kick in until you’re “late” on a payment. Lump sum vs. installment payments come into play if a financial institution or creditor fronts you an amount of money. Now that we’ve covered when this payment option actually arises, let’s get into which makes the most sense for different financial scenarios.
Lump Sum Payment or Installment Payments?
There’s a pretty simple way to look at these two types of payback: lump sum makes sense if you can comfortably afford it and want to save in the long term. While installment payments make a lot of sense if you’re more financially comfortable with a consistent monthly payment.
If you’ve borrowed a large amount of money but your situation has changed, and you can now reasonably pay off the entirety of the loan or bill in one shot, or with a few larger-sized payments, that’s great! This will allow you to pay down what you owe in a shorter period of time, ultimately leading to a reduction in the amount of long-term interest you end up paying.
On the other hand, if you’re more comfortable with a steady installment payment that you can reliably work into your budget, that is also a viable option! You will end up paying more in the long run because of the interest payments, but long term savings aren’t always ideal even if it sounds better on paper. If you don’t have a large cache of money, it makes a lot of sense to slowly and steadily pay off borrowed money as you steadily accrue more money. It might sound like the less desirable option, but it will also give you opportunity to budget more consistently, and allow you to grow things like a savings account fund at a pace that makes sense for you.
Are you looking to borrow money through a loan or credit line? HRCCU can help! We offer personal, vehicle, and home loans, as well as credit card options, all with reasonable APY rates, and of course you can always pay these loans off quicker with a lump sum payment, if you choose to do so!