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If You Must Get a Loan Remember Shorter Term = Less Interest

FFA’s philosophy is to save for emergencies and unexpected expenses. We even recommend paying cash for large ticket items such as appliances, TV’s, home improvement projects, furniture, and cars. However, if you ever have to get a loan, remember this: shorter term = less interest.

What does this mean? Let’s use a car purchase example. You purchase a car for $20,000 with $0 down at 8%. If you choose a five year loan with monthly payments of $405.33, at the end of your loan you will have paid $4331.64 in interest. If you choose a two year loan with monthly payments of $904.55, you will have paid only $1709.09 in interest. Sure, your monthly payment is higher with the two year loan, but in the grand scheme of things, this is the best option. Why? Because you pay less for your car. Thinking long-term like this, as opposed to monthly, is a good habit if you want to be wealthy.

Let’s consider a different purchase. You just moved into a new home or apartment and need furniture. You go to a local furniture store and pick out a two sofas, a dining room table, and 4 chairs. The total amount of this purchase is $4000. At the register, the cashier gives you the option to finance your furniture at 19.99% with a store credit card. Your estimated monthly payment will only be $80. You decide to take the offer. If you only pay the minimum each month, you will pay your furniture off in 44 years and will have paid $16,442 in interest. However, if you pay it off sooner you will pay less interest, and the amount of interest paid will depend on how many months that takes.

At this point you might be thinking, “I will definitely pay it off sooner!” Unfortunately, for the majority this is rarely the case. Moving forward from this purchase, the thinking behind making a large purchase can become, “How will this impact my monthly budget?” Instead of, “How much will I truly pay for this item if I charge it?”

Remember, paying cash is always the best option. However, if you must get a loan you will pay less interest if you 1. finance for a shorter term, and 2. pay your credit card (s) off as soon as possible.

Hi! I’m Holly, the founder of Financial Impact and an award-winning financial coach. I help career-driven leaders and entrepreneurs create wealth, take the stress out of managing money, and feel confident and powerful when it comes to their finances.

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