As the United States faces economic uncertainty, many consumers are considering personal loans. If you’re looking for a loan to help cover your expenses now, you need to pay attention to the term of the loan in order to save money on the total cost of your loan. The term of the loan refers to the time you have to pay off your loan.
Although each individual and family has a unique situation, all borrowers should consider the same information before determining the length of loan to accept. You can compare interest rates and terms from multiple lenders using a free online tool like Credible.
If you’re considering getting a personal loan, here are some factors to consider that could affect how you decide how long your terms will be.
- Monthly payments
- Current financial situation
- Amount of the loan
- Bonuses or advantages offered by a lender
- Personal considerations
1. Monthly payments
When taking out a personal loan, one of the critical factors to consider is the monthly loan payment. If you spread your repayment over a long period (for example, five years instead of three), your payment will be lower, but you will pay more for your loan and you may have a higher interest rate. Often lenders offer a lower rate interest rate on short-term loansaccording to the Consumer Financial Protection Bureau.
By using Credible, you can see what each personal lender has to offer. Simply enter your desired loan amount and your estimated credit score to see what rates are available.
Generally, lenders offer repayment terms between 12 and 60 months. Here is an example :
- Customer A takes out a personal loan of $5,000 with a repayment plan over 5 years (60 months) and 10% interest. Customer A’s monthly payment would be $106.24 per month. At the end of their loan, they will have spent $1,374 in interest.
- Customer B also takes out a $5,000 personal loan. They have a repayment term of 3 years (36 months) and an interest rate of 8.5% (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, their loan will be repaid two years earlier.
You can also estimate your payment options with an online personal loan calculator.
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2. Current financial situation
If you run out of money each month, choosing a longer repayment term for your personal loan may be a better option for your situation. Lower monthly payments can be easier to manage. If you take out a personal loan, make sure you 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 you have a poor credit score or a spotty credit history.
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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.
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4. Bonuses or advantages offered by a lender
When comparing rate offers from multiple lenders, ask if they offer any special promotions for terms. If you can get lower interest rates during part of your loan repayment schedule, you could save money and pay off the loan faster.
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5. Personal Considerations
When considering the terms of a loan, consider your personal circumstances. Will you have a tax return or other large 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 meets everyone’s needs. You will need to consider your credit score, financial needs, and ability to make monthly payments to determine your loan repayment term.
As you move forward in your search for a personal loan, be sure to consider more factors than just 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.
Also, consider if you have other options like a 0% APR credit card, using money from your savings account, or selling items from home. Take the time to compare rates from multiple lenders from an online tool like Credible to ensure you have all the information you need to make the best financial choice for your family.
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