What Are the Advantages of Repaying an Installment Debt Over a Long Period?
Installment loans are debts that you repay over a fixed period of time. Your payments are roughly equal over the course of the loan, although in some instances you have the option of making smaller interest-only payments for a limited period at the start of the loan term. There are many benefits to taking out long-term installment loans, including protection against inflation and possible tax savings.
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Payment
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Mortgages are a type of installment loan and these loans usually have term times that range from five to 30 years. If you borrow $200,000 at a 5 percent interest rate and repay the debt over 30 years, you will have a monthly payment of $1073.64. If you borrow the same amount of money and pay the same interest rate but repay the loan in just 10 years then you will have a monthly payment of $2121.31. You pay your loan off quicker with a short-term loan but you have less money left each month to cover your other costs. Long-term loans make expensive houses and vehicles more affordable for people.
Financial Planning
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The sooner you start to save for retirement, the more likely you are to have enough funds to cover your day-to-day expenses when you actually stop working. No one can predict the future so you have no way of knowing precisely how much money you will need to make your retirement years comfortable. If you take out a long-term installment loan such as a 30-year mortgage, then you know how much money you will need to set aside to cover your housing costs over the next three decades. Your mortgage probably represents one of your biggest expenses so having a long-term installment loan can make your financial planning much easier.
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Inflation
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Inflation causes prices to rise and while deflation occasionally causes prices to drop, over long periods of time, prices typically increase. If you have a long-term installment loan, then you have a fixed monthly payment. Your wages should rise in line with inflation, which means that your loan payment accounts for a smaller and smaller percentage of your income as time moves along. If you take out a variable rate loan or a series of short-term loans then your borrowing costs will rise with inflation, whereas you can combat the effects of inflation with a long-term installment loan.
Taxes
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You typically have to pay a higher rate of interest if you take out a long-term loan, as opposed to a short-term loan because the longer your loan term, the more chance you have to default on the loan. However, in many instances, interest payments on home loans are tax deductible. Depending on your overall tax situation, these long-term deductions may lower your overall costs, even if you end up paying a higher interest rate. However, interest payments on other types of installment loans are not tax deductible and, even with home loans, you should consult a financial professional before choosing a term based on potential tax savings.
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