When it comes to footing the bill on larger expenses, there are usually two ways to pay.
You can pay in a lump sum or in installments of payments.
A lump sum is one large payment and installations are multiple payments, typically paid on a monthly basis.
Like many financial decisions, each option has benefits and drawbacks.
Your own finances will be the biggest determinant in if you are choosing to pay off an expense as a lump sum or in smaller installments.
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 is restricted to larger sums of borrowed money.
In other words, these are the kinds of payments that charge an interest rate.
For example, something like your monthly electricity bill or a Wi-Fi payment is just that, monthly.
These are service costs — not the type of costs that come with an interest rate — which means you won’t be paying an additional cost on an interest rate.
In addition, you aren’t paying for services in lump sums. They’re nearly always month-to-month.
Lump sums and installment payments come into play when you’re borrowing money for a car or home loan, and 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 discuss different financial scenarios.
When Should I Choose a Lump Sum Payment vs. 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.
On the other hand, you should pay in installment payments if you don’t have enough money upfront and you’re more comfortable with a consistent monthly payment.
If you’ve borrowed a large amount of money but your situation has changed and you can now 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 off your debt 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 a savings account fund at a pace that makes sense for you.
We Can Help You Borrow
Are you looking to borrow money through a loan or credit line?
HRCCU can help.