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You could just buy a bigger internal HDD for your laptop.
No, I wouldn't actively install programs to any external drive, as the drive letter could change if you're not careful and be a simple reason things dont work right down the road.
Use externals for storage. You can download Steam games to C Drive and then make a backup to your external if you like. Then on C Drive uninstall the games except for what you play most often.
Buying External Drive, then go with USB 3.0 + 7200rpm
It's like trying to fill a swimming pool with a garden hose. It'll happen, but because the flow is so limited it's gonna take a while.
Using the external drive as Backup works very well because you're only needing to move the game itself. And they can do that just fine.