Lump Sum Payments/Monthly Installments – what’s better?

I have come to realize as I begin to learn more about how to manage debt, how to budget, and altogether how to be more financially responsible – that while there are many common approaches that people can use to help achieve goals such as these – it also has become clear that different types of repayment and budgeting strategies work better at various times in our lives as well as being contingent on the type of debt, the borrower possesses.

For us, we have certainly juggled many different types of debt over the years – and this has been what has driven me to try and establish better debt repayment methods as well as help us keep our debts as low as possible. Among these strategies, there are two opposing types of repayment options that many individuals use to free themselves of their debts. The two I am referring to are lump sump payments and equal monthly installments. The idea for many people is to find a method of paying off their debts faster and easier. Let’s look at these two options – paying off you debt via a lump sum or making monthly payments. We’ll look at this more closely and compare how each can help you deal with that dreaded d-word.

Lump Sum Payments

Looking first at lump sum payments, we can see that this can be an opportunity for borrowers to pay off a large chuck of their debt in one false swoop, thereby giving them an even greater potential for paying off their bills much faster. Other advantages of this payment solution include reducing the amount of interest you will have to pay on your loans, since you are reducing the overall debt balance or balances. While we do know that some interest rates are much lower than others, these fees still continue to grow and be added on top of the your outstanding loan balances, making it difficult to pay off the loan. With a lump sum payment however, let’s say you are paying down your credit card balance and the interest is quite high, as you pay off a large amount off the total amount, you can cut down on the amount of interest you will have to pay, as you move forward to next month’s payments.

If you are wondering when is a good time to make a lump sum payment, from my experience and also from what I have learned from others who have taken this debt-relief approach – the simple answer is whenever you can. If for example, there are instances where you receive a large bonus or monetary gift – then this could present you with the opportunity to use the money to pay down your debts by making one bigger payment. There may also be times when you are able to bite the bullet and go without other items that month and make a lump sum payment to help speed up your repayment plan.

If your goal is to pay down your debts as fast as possible, then this could be a great method of getting you there sooner. Not only will you free yourself of the burden of having large debts, your credit score will also improve and you will encounter less of a hassle with approaching banks for loans in the future.

Equal Monthly Payments

Alternatively, whose to say that a lump sum payment will necessarily help you pay down your debts any faster than making your equal monthly payments will? For many people who are not in the position to pay more than their current monthly payments, there is certainly no shame in following along with this routine. In fact, making consistent payments demonstrates a level of responsibility and commitment to paying off your loans and loan providers appreciate this quality in a borrower. Continuing to pay off the same amount each month at a steady pace, allows many individuals to manage their ongoing and in most cases, multiple payments without faltering and missing payments.

This is also an effective way to keep your credit score in a healthy range and keep your total debt balance at bay. On the other hand, if you decide to up your payments now and again, you will want to be sure that you have enough funds to cover all of your bills. Making too big of a payment, such as a lump sum could in some cases set you back financially, and some payments could end up being missed because you can’t make them. This for sure is a downside to making a lump sum payment and a pro for continuing to stick with your ongoing monthly payment routine. While you may think it is taking you longer to pay off your debts, remember you are still making progress and this shows true dedication to continually meet your ongoing debt repayment demands.

Ultimately, I would conclude that sometimes it may be best to make a lump sum payment instead of continuing on with your monthly payment schedule. You will of course want to weigh your options first and make sure you are in the financial position to make a lump sum payment and that it won’t in fact set you back in your finances.

In looking at our specific situation, we at this point continue to mostly make monthly payments of equal value. However, if a monetary bonus comes our way in the near future, perhaps we will make plans to make a lump sum payment and get a jump start on paying down our debts a bit quicker. Good luck with your payments and all things budgeting – I hope you find a method of debt management that best suits your current financial situation.