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Personal loans have repayment terms that typically range from 12 to 60 months, or even longer. But short-term personal loans are also available, with terms ranging from a few weeks to 12 months.
A longer loan term results in lower monthly payments, but higher interest charges. If you’re looking to save on interest, you might prefer a short-term loan, even if the repayment schedule is a bit aggressive.
Here is more information on short and long personal loan terms when deciding which is best for your situation.
Credible, it’s easy to compare personal loan rates and different loan terms from various lenders, all in one place.
Advantages of short term loans
- Reduced interest costs — Because you pay it back quickly, interest charges are lower on a short-term loan.
- Clear your debts faster — If your goal is to pay off a loan as quickly as possible, a shorter term will help you achieve that.
- Small loan amounts available — If you don’t need a large sum of money, a short-term personal loan can help you avoid borrowing more than you need.
Disadvantages of short-term loans
Short-term loans can also have a few disadvantages that you should keep in mind:
- Higher interest rates — Short-term loans tend to carry higher interest rates than long-term loans. It may be a good idea to do the math to make sure that a short-term loan is actually cheaper than a long-term loan with a lower interest rate.
- Expensive fees — Short-term loans can come with high fees that can add to the total cost of your loan, such as origination fees for loan processing and late payment fees.
- Only offers a short-term solution — A short-term loan cannot provide long-term financial support and is only designed to cover immediate cash flow problems.
Advantages of long-term loans
Long-term loans have several advantages, including:
- Larger loan amounts — With long-term personal loans (especially with repayment terms of five years or more), it’s usually easier to get larger loan amounts than you can get with short-term personal loans.
- Credit creation potential — If you pay off all your personal loans on time, it can improve your credit score. A long-term personal loan gives you more time to make regular payments.
- Smaller monthly payments — Since repayment is spread over several months or years with a long-term personal loan, your monthly payment amount will likely be smaller and more manageable than a short-term loan.
If you are looking for a loan with flexible repayment terms, Credible allows you to view your prequalified personal loan rateswithout affecting your credit score.
Disadvantages of long-term loans
Before taking out a longer-term loan, keep these potential downsides in mind:
- Increases debt-to-income ratio — most debt you have, the higher your debt-to-equity ratio may be, making it more difficult to qualify for other loan products. If you know you will need a large loan product while you are paying off a long-term personal loan, such as a car loan or mortgage, you may want to wait to get a personal loan, or you can opt for a loan with a shorter term instead.
- May be more expensive — Although short-term loans tend to have higher interest rates than long-term loans, you often end up paying more interest over the life of the loan because you have to pay interest for many months. extra with a long-term loan. Again, it’s important to analyze the numbers here to see which option can save you more money.
- Longer financial pressure — If you’re struggling to pay off your debts, a long-term personal loan can add a lot of financial stress to your plate for many years to come. You may not want this debt hanging over your head for so long.
What loan repayment term is right for you?
Not sure if a short-term loan or a long-term loan is right for you? It can be difficult to make that call, but looking at the numbers can help make the decision easier. The first thing you’ll want to consider is how the term of the personal loan will affect your monthly payment amount and the amount of interest you’ll pay over the life of the loan.
For example, let’s say you take out a loan for $5,000 with an interest rate of 11%. Here’s how the term of your loan can affect the amount of interest you’ll pay:
- Duration of the two-year loan: Your monthly payment would be $233 and you would pay $593 in interest.
- Five-year loan term: Your monthly payment would only be $109, but you would pay a total of $1,523 in interest, almost $1,000 more than you would pay with the short-term loan.
These potential savings are significant, but only if you can afford the monthly loan payments in the short term. You can use Credible personal loan calculator to get a better idea of the personal loan term that might be right for you.
It can help to shop for short and long term personal loans with different lenders before making a decision. Personal lenders offer different loan amounts, interest rates, fees, and repayment terms, so comparison shopping can help ensure you’re getting the best loan and repayment terms for your financial needs.
If you’re ready to apply for a personal loan, Credible makes it quick and easy compare personal loan rates to find the one that suits your needs.