Lump Sum Payment vs Multiple Payments on Loans

Lump Sum Payment vs Multiple Payments: Which is Better?

When it comes to paying off personal loans, there are several ways you can do it. You can either fork out large amounts and pay it off quicker or make multiple payments until the entire balance is paid off. If it’s your first time paying off a personal loan, you might find it difficult to choose which is a better option. No need to worry, though, because this is a question with no right or wrong answer. The answer will depend on several varying aspects, like the type of loan, the repayment terms, and your current financial situation.

To help you choose between making one big payment or making smaller multiple payments, we shed light on the differences and how they can affect you and your credit score.

Lump sum payments reduce the interest amount

The interest rate varies depending on the provider and the term of repayment. The lowest personal loan add-on rate is 13.2% per annum for loans without collateral and 9.48% per annum for loans with collateral. The add-on rate is a flat rate placed on top of the principal amount borrowed.

If your monthly installments are getting eaten up by interest, it might be a good idea to pay off a chunk of it because lowering the principal will also lower the overall interest. For example, if you borrowed ₱100,000 at a rate of 1.30% for 3 years, you’d pay a monthly installment of ₱4,077.78, which means you’d be paying more than ₱45,000 in interest. If you pay a lump sum amount, however, you’d be paying interest at the rate of the lower principal. For example, if you pay ₱20,000 as a lump sum, you’d be paying interest for the remaining principal, which becomes ₱80,000. That’s more than ₱25,000 in savings compared to the original interest rate of the original principal amount.

Installment payment amounts are smaller

Following the agreed upon repayment terms has its advantages in that the amount you have to pay each month is fixed and not that high. It may take longer to repay your loan, but that’s exactly why you chose a certain payment term. One good thing about personal loans is that they’re flexible, allowing you to choose a repayment term that you can afford. Fixed monthly installments help you stay within your budget and plan out your expenses for the month so you won’t have to worry about missing payments.

Lump sum payments help you pay your loan quicker

When you pay a lump sum, you not only lower the interest you have to pay, you also decrease the period within which you have to repay the loan. Depending on how much you can pay outright, it’s possible to shave off a few years on your loan repayment. For many, debt is one of the main hindrances to saving up for a retirement fund or buying a home. It’s only natural for them to want to repay their debts at the soonest possible time.

Another thing you can do is add a few extra hundred or thousand pesos to your monthly installments; you’d be surprised how much time and money you can save at the end of your personal loan term. 

Installment payments make managing multiple loans easier

Because the amount is fixed on personal loan monthly installments, they’re easier to manage—even if you have several loans you’re trying to pay off. You needn’t worry about them as long as you keep track of your payments and the due dates. You can make long-term plans like buying a home or getting married after all your loans are paid off because you know exactly when they’ll be paid off—at the end of the agreed-upon fixed term. Slow and steady wins the race, and as long as you make your monthly installments, you’ll pay off that loan in no time.

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In the end, the decision of whether paying your personal loan via a lump sum or smaller multiple payments is up to you. Take stock and examine your financial situation so you can determine what you can afford to repay and how long you’re willing to repay it. Ensure that you have a safety net in place in case of unforeseen circumstances; setting up an emergency fund before paying off your loans is a good way to guarantee you won’t come up short when it comes to your financial obligations.

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