I have a 120GB USB hard drive, if i install games on it, will they be slowed down by the fact it is USB?

Depends on the game, I know a lot of people that do this to save space and allow them to use a smaller boot-drive, but it will definately effect performance on gmaes that rely heavily on HDD activity.

I personally think that HDD is the least important factor for gaming performance, but it is a factor.

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