A personal loan can help you cover a car repair, medical bill, or almost any other type of expense. As you shop around for one, you should consider more than just the annual percentage rate (APR), which includes the interest rate and fees.
The term length of your personal loan is just as important. The length will tell you how long you’ll have to make monthly payments and how much total interest you’ll pay. Find out how to choose the best personal loan term length for your unique situation.
How do personal loan terms work?
When you apply for a personal loan, you’ll have to think about your preferred loan term or how much time you’d like to repay your loan.
While a larger loan amount usually comes with a longer loan term, a smaller personal loan might have a shorter term of one year or even less. In general, however, lenders offer repayment terms that range from a few months to multiple years.
For example:
- Less than 1 year: Emergency expenses, like a $500 car repair or medical bill
- 1 to 2 years: Lower-cost expenses, such as $3,000 in furniture
- 3 to 4 years: Mid-range expenses, like consolidating $15,000 in debt
- 5 to 7 years: Larger expenses, such as a $30,000 kitchen renovation
Related: How Do Personal Loans Work?
Pros and cons of short-term vs. long-term personal loans
Personal loans are usually classified as short-term loans or long-term loans. A short-term personal loan is exactly what it sounds like: a loan with a shorter repayment term. A long-term loan, on the other hand, has a longer repayment term. Each option has its own benefits and drawbacks you should be aware of.
Short-term personal loans
A short-term personal loan usually has a repayment term of one to two years or even less. It can come in handy if you need fast cash to cover an unexpected emergency expense.
Pros
- Easy application: Most lenders have an online application. It usually takes a few minutes to complete.
- Fast funding: Short-term personal loans often offer fast funding. You may be able to get your money the day you get approved or shortly after.
- No collateral: Typically, short-term loans are unsecured, meaning they don’t require collateral. If you default on your loan, the lender won’t take your asset.
Cons
- High APRs: Short-term personal loans often have higher APRs. This is because they’re typically offered to those with bad credit and don’t involve collateral, which means lenders consider them a higher risk.
- Smaller loan amounts: If you take out a short-term personal loan, you’ll likely be limited to a small amount of cash. It may not be enough to cover a larger expense.
- Additional fees: Some lenders charge extra fees in addition to interest, like origination fees and late fees. Do the math and make sure you can afford the loan with all the fees.
Good to know: Avoid taking out payday loans (a type of emergency loan, usually for 2 weeks) as these loans tend to come with exorbitant interest rates and fees.
Long-term personal loans
A long-term personal loan has a repayment term of longer than five years. These terms make sense if you need to borrow a large amount of money and want lower monthly payments.
Pros
- Might be able to borrow more money: With a long-term personal loan, you can get approved for a larger sum of cash. This is ideal if you have a larger expense, like a home improvement project.
- May have lower monthly payments: A long-term personal loan usually means lower monthly payments. It can be easier to fit into your budget than a short-term loan.
- Many options: There are a variety of lenders that offer long-term personal loans. If you shop around, you should be able to find one that meets your needs.
Cons
- Can be difficult to qualify for: Compared to a short-term loan, a long-term loan is usually harder to get. This is particularly true if you have fair or bad credit.
- Higher interest costs: While a long-term personal loan comes with lower monthly payments, you’ll pay more in interest. A shorter loan can keep your overall costs lower.
- May interfere with other financial goals: Since a long-term personal loan often takes years to repay, it can get in the way of other goals, like retirement and college savings. You’ll be in debt for longer.
Choosing the best term length
Rates can vary for different term lengths. But a longer term usually means you’ll pay more over the life of a loan. Consider the following to help you decide on the right term length.
- Loan amount: Even if you’re approved for a large loan amount, it doesn’t mean you should accept it. A larger amount leads to higher payments and interest costs. Determine how long it will take you to repay your ideal loan amount over different term lengths while still being able to afford your payments.
- Overall cost: The overall cost of a personal loan is based on interest, fees, and term length. A personal loan calculator can help you compare the overall cost of different time periods.
- Payment: As you consider various different loan amounts, understand their monthly payments. A loan with a shorter term will have higher monthly payments, but you’ll pay less in interest and repay it faster. A longer-term loan means more affordable payments but higher interest charges.
- Interest rate: In most cases, longer-term loans have lower interest rates than shorter-term loans. Remember that a lower interest rate can save you hundreds or even thousands.
- Future changes to income or expenses: Think about how your income or expenses may change down the road. If you plan to move or have kids in the near future, for example, you may have less income at your disposal and be better off with a longer term that offers lower monthly payments or a smaller loan amount.
Check Out: How To Compare Personal Loans
FAQ
Can I change the term length of my personal loan after approval?
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Is it possible to refinance a personal loan to adjust the term length?
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How do term lengths for personal loans compare to term lengths for other types of loans?
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