How long should your personal loan be?



Ready to take out a personal loan? Discover the advantages of opting for shorter loan terms here. (iStock)

As the United States faces economic uncertainty, many consumers are considering personal loans. If you are looking for a loan to help cover your expenses now, you need to pay attention to the loan term in order to save money on the total cost of your loan. Loan term refers to the time you have to repay your loan.

Although each individual and family has a unique situation, all borrowers should consider the same information before determining the length of the loan to accept. You can compare the interest rates and tenure terms of several lenders using a free online tool like Credible.

If you are thinking about getting a personal loan, here are some factors to consider that could affect how you decide on the length of your terms.

  1. Monthly payments
  2. Current financial situation
  3. Amount of the loan
  4. Bonuses or benefits offered by a lender
  5. Personal considerations

1. Monthly payments

One of the critical factors to consider when taking out a personal loan is the monthly loan payment. If you spread your repayment over an extended period (i.e. five years instead of three), your payment will be smaller, but you will be paying more for your loan and you may have a higher interest rate. Often times, lenders offer a lower interest rate on shorter-term loans, according to the Consumer Financial Protection Bureau.

By using Credible, you can see what each personal loan lender has to offer. Simply enter your desired loan amount and your estimated credit score to see what rates are available.

Typically, lenders offer repayment terms between 12 and 60 months. Here is an example :

  • Client A takes out a personal loan of $ 5,000 with a 5-year (60-month) repayment plan and 10% interest. Client A’s monthly payment would be $ 106.24 per month. At the end of their loan, they will have spent $ 1,374 in interest.
  • Client B also takes out a personal loan of $ 5,000. They have a 3 year (36 month) repayment term and an 8.5% interest rate (the lender offered a lower interest rate for a shorter repayment term). Their total monthly payments will be $ 157.84 per month. At the end of their loan, they will have spent $ 682.16 in interest.
  • Results: Client B paid about $ 50 more per month but saved $ 691.87 in interest. In addition, they will have repaid their loan two years earlier.

You can also estimate your payment options with an online personal loan calculator.


2. Current financial situation

If you run out of cash every month, choosing a longer repayment term for your personal loan may be a better option for your situation. Lower monthly payments can be more manageable. If you take out a personal loan, be sure to agree to terms that you can afford each month.

If you can, a shorter term loan will save you more money and you can pay it off faster.

You should also consider your credit history. Your lender may limit the terms of your loan if they approve your application if your credit rating is low or if you have an irregular credit history.


3. Loan amount

The total amount you borrow for your loan is a crucial factor in determining whether you choose a longer or shorter repayment term. Obviously, a larger loan balance over a shorter repayment term will result in much higher monthly payments than a smaller loan over a longer repayment term. The amount of money you borrow can also affect your interest rate.


4. Bonuses or advantages offered by a lender

When you compare the rate offers of several lenders, ask them if they have any special promotions for terms. If you can get lower interest rates for part of your loan repayment schedule, you could save money and pay off the loan faster.


5. Personal considerations

When considering loan terms, consider your personal situation. Will you have a tax return or other major salary that could help you pay off the loan quickly? Does the lender have prepayment penalties? Does the lender require you to have specific repayment terms?

There is no one right answer that fits everyone’s needs. You will need to look at your credit score, your financial needs, and your ability to make monthly payments to determine how long to extend your loan repayments.

As you go through your personal loan research, be sure to consider more factors than the length of your terms. Other things to consider are the interest rate, whether to choose a secured or unsecured loan and the lender’s fees.

Plus, find out if you have other options like a 0% APR credit card, using money in your savings account, or selling items from your home. Take the time to compare the rates of several lenders using an online tool like Credible to make sure you have all the information you need to make the best financial choice for your family.



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