Just a query....

richardvc

More of interest than anything else but came up in a discussion at work...

1. Colleague wants a loan and can easily afford repayments
2. Could pay it back over 12 months
3. Has chosen to pay it back over 24 months but longer available
4. APR identical on all
5. Plans to pay it off early
My question is...
By lengthening the term, was that a smart move ? Should she go for the longest term available ? What's the smartest way to borrow especially if she plans to pay it back early ?
She asked me but I wasn't sure.

StopIt

If the APR was the same, there's no point in borrowing for a longer period if they're going to pay it off early.


Instead they've added the risk of not paying it off early, and paying more interest over the term of the loan.

richardvc

Thanks Stopit, that goes against my thoughts.

I believed that if you are going to pay it back early you might as well have the lowest monthly payment you can....yes you pay more interest if you let it run the full term BUT spend less on a monthly basis !

Shows what I know...........

ReadingTim

The smartest move is the one which pays the least amount of interest in £. Given interest is (essentially) the time value of money, it seems sensible to borrow for as little time as possible. However, over a longer term, if inflation outpaces the rate of interest on the loan, it's worth going for a longer loan term, but that's probably not relevant here.

Ultimately, it's about her attitude to risk. If she can "easily afford" repayments on the shorter term, why wouldn't she take it? What else does she think she might need the cash for, or the breathing space between what she chooses to repay, and the minimum monthly payment (as it were)?

Finally, how's her financial self-discipline? Will she voluntarily overpay, given she doesn't have to, or be tempted to use the 'spare cash' for a holiday, car or other spending?