The Problem With Low Monthly Payments

Easy, Low Payments

Whether you are considering debt consolidation loans to reduce your credit card payments or a long term car loan to keep payments manageable, don’t be duped into thinking that low monthly payments are a good thing. Yes, on the surface, those affordable payments sound like a great idea, but, for a number of reasons, they can be your downfall.

How Will Lower Payments Affect You?

1. You will be in debt longer.

Unless you are able to get your interest rate reduced, a lower payment will always mean a longer term. This is upside down thinking; your goal should be to get rid of your debt quicker – not sign up for additional years.

2. You pay more interest.

Interest is applied to the unpaid balance of your loan, so the longer it takes you to pay off your debt, the longer that unpaid balance sticks around and the more interest you pay. Furthermore, some lenders (especially in the case of auto loans) charge a higher rate for longer term loans.

A Consumer Reports study shows that for a $30,520 car loan with a 10% down payment, the borrower will pay $1,637 more for a 72 month loan than a 48 month loan.

3. You take on more risk.

Long term loans, especially auto loans, create more risk. How? Because cars depreciate with time, meaning the longer you take to pay for the car, the longer you will be upside down (owing more than the car is worth). If your car is seriously damaged or stolen during this upside down period, your insurer will likely pay you the value of the car – not what you owe on it.

Furthermore, if you decide to trade your car, you will get less than what you owe on it, effectively rolling that debt (and being upside down even longer) into your new purchase. These things really happen – I know a couple who owes $30,000 on each of their two cars, which are only worth $15,000 each. What a nightmare!

4. You may be tempted to take on more debt.

If a debt consolidation loan lowers your payments, don’t start thinking you have lowered your debt. You haven’t . . . you simply moved it. The kicker is this: If you haven’t dealt with the reason you accumulated the debt in the first place, you could let that lower monthly payment lull you into a false sense of well-being . . . and even more debt.

5. You could develop a perpetual payment mindset.

If you find yourself saying, “I will always have payments,” you are settling for a life of bondage. I realize years of debt payments can create a habit difficult to break, but, believe me, you can do it. Don’t ever allow the lifetime payment mindset permeate your psyche.

A Better Plan: Focus on Paying Off Debt

Never again buy anything because you can afford the monthly payments. Instead, consider the size of the loan, because that is how much debt you are taking on. If you forget lower payments and strive for huge payments, you can get the debt out of your life.

For example, I have a friend who was on a 23-year plan to pay off her student loans, but, by making bigger payments, is now on a six-year plan. Yes, it may take a few years to become debt free, but once those years pass, you will be able to pay yourself all of the money you are currently shelling out to your creditors. There is light at the end of the tunnel; a few years of sacrifice for a lifetime of freedom . . . you can do this!

You will, in time, experience a low monthly payment which I highly recommend: Nothing at all!

Have you ever justified a purchase because of the low monthly payments? If you have ever taken a debt consolidation loan, would you say it was more helpful or less helpful over the long term? Leave a comment!

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  1. Sheila

    A few years ago my 30-year old daughter and her husband consolidated $25K in credit card debt in a home equity loan. I begged her to reconsider. Within 2 years, they were $40K in credit card debt and had barely made a dent in their home equity balance. They had not changed their underlying issues: Keeping up with the neighbors and living way beyond their means. Money problems have led them to separation and a coming divorce.

    • Joe Plemon

      Wow, Shelia. That says it all. Thanks for sharing — hopefully, other readers on this site can learn from the mistakes your daughter and her husband made.

  2. Jake Erickson

    I have never personally taken a store up on their deal of monthly payments, but I’ve noticed that many of them offer them on anything from furniture to TVs to computers, etc. These deals make the purchase seem feasible to the majority of people because the monthly payment is so low, but you end up paying a lot more for that item than the sticker price.

    • Joe Plemon

      How true. There is a reason those merchants push for low monthly payments, and it isn’t to help the consumer.

  3. Very interesting article that paints a different perspective on the negative consequences of monthly payments. Of course, there are situations in which individuals have little choice but to ask lower payments if their individual income does not allow for higher payments that he or she may not afford.

    However, a major debt problem cannot be tackled with low monthly payments long-term. It’ll be like digging through sand at the beach with a spoon. At some point, one will have to find another means of income in order to increase the monthly payments so that one isn’t in debt for a lifetime.

    • Joe Plemon

      Yes, a lower interest loan can be a stopgap help to lower the payments, but the real issue is to confront the underlying issues which caused the debt problem in the first place. Case in point: see Sheila’s comment above.

      Your analogy of comparing low monthly payments to digging sand at the beach with a spoon is a great one!

  4. Timothy

    I’ve tried consolidation loan once because I was tied into different credit cards because I needed to buy furnitures and stuffs. Before the interests are high and wasnt able to pay them because I lost one job so my friend told me try consolidation loan. It did helped me pay it off based on my current income. I believe consolidation loan is only for an emergency, not like a lifestyle of making another opportunity to buy more stuffs. In my case it did helped me because if I didnt do that before I would be really drowned in debt because I wasnt able to pay them even the minimum payment. As an emergency, I think it is advisable to others who really need help but try not to get another debt. I closed those credit cards after my consolidation loan so I wont be tempted to use those credit cards. 🙂