Should I only be making minimum payments on a loan?
While you certainly can make minimum payments on a loan, that doesn’t mean you should. Minimum payments seem affordable and convenient — but they’re also more expensive than paying larger installments.
However, there are times when it’s better to make minimum payments, especially if you’re in a situation where funds are very tight and you’re on a strict budget.
Ideally, you should pay more than the minimum payment on a loan, but in the end, that decision is up to you.
Why is it better to pay more than the minimum payment on a loan?
Paying the minimum amount for each pay period until the loan is paid off is actually more expensive than paying off the loan in larger installments.
As with paying off loans early, the reason why only paying the minimum amount is more expensive comes down to interest. Interest can really add up, especially if your loan has a high interest rate.
Paying the minimum amount per each pay period can actually keep you stuck in a cycle of debt — this is a common occurrence with credit cards. Paying the minimum each month instead of the full balance adds extra interest on top of what you’re already paying.
How much more than the minimum payment should I pay?
That depends on a number of factors, and that is ultimately up to you. The best way to determine how much more than the minimum payment you can pay is to review your spending habits and see how much money you have left at the end of each pay period. From there, you can include an additional amount of money that you’re comfortable with adding to the minimum payment.
Creating a budget in a Google Sheets document is a great way to track your spending each month or even on a weekly basis. (Not to mention it’s free to use!) This might even help you find places where you can cut back on spending and save more money, some of which can go back to your loan payment.
You don’t want to put yourself into debt by paying more than you can afford for each payment period, so make sure you have enough money leftover at the end of each loan payment period, whether it’s set aside for an emergency or rainy day fund or something else entirely.
Do minimum loan payments affect my credit score?
As with any loan payments, minimum loan payments do have an effect on your credit score. As long as you’re paying the minimum installment (or more) on time and aren’t missing any payments, this can help improve your credit score.
If you can’t afford to go over the minimum payment, stick with the minimum payment. When it comes to your credit score, it is always better to pay the minimum amount than miss a payment. A missed or late payment can really hurt your credit score, as payment history makes up the biggest weighted percentage of your credit score calculation.
For more information
For more information about minimum payments and loans, contact LoanStream today. If you’re ready to apply for a loan, go ahead and submit your information through us. Our network of lenders will reach out to you with personal loan offers, so you can choose the one that works best for you.