What Personal Loan Term Length Should You Choose?

Some lenders specialize in shorter term loans that you have to pay back in weeks or month. Other lenders offer terms that last up to five years.

The term of your loan affects how much it costs to borrow money. Most loans have a simple interest rate and when you pay back the loan amount, or principle, you also have to pay interest. Generally, paying a personal loan back faster will save you money on interest and make it cheaper to borrow money.

When To Get a Short-Term Loan

A short-term personal loan may be a good fit if you need to borrow a smaller amount of cash and can pay it back quickly. You might consider taking out a short-term personal loan to pay for an emergency car repair, moving expenses, a family vacation, or consolidating debt.

Pros

• Typically lower interest rates

• Pay off debt faster compared to long-term

• Typically little to no restrictions on the use of money

Cons

• Generally a higher monthly payment

When to Get a Long-Term Loan

A long-term personal loan may be better when you need to borrow more money to pay for home repairs or you have a sizable debt to consolidate. A longer-term loan often works when you need a more affordable monthly payment. 

Pros

• Usually lower monthly payments compared to short-term

• Larger loan amounts are generally available for longer-term loans

• Typically more flexibility compared to short-term loans

Cons

• Typically higher interest rates compared to short-term

• The payment schedules result in more time to pay off the loan

• May be charged more in loan origination or other fees compared to short-term 

Factors to Consider When Choosing a Personal Loan Term Length

The length and terms of a personal loan heavily impact its cost and your monthly payment. Consider the following when selecting the right personal loan term length for your financial situation. 

Your Financial Goals and Needs

Before taking out a personal loan, be sure you can pay it back according to its terms. Your credit score can take a serious hit if you fall behind or default. So, if you plan to buy a house or make a big financial purchase in the future, a drop in your credit score can be costly. 

Evaluate Your Current and Future Financial Situation

You may be better suited for a personal loan with a longer term if your budget is tight. While you’ll typically pay more interest, your monthly payments will be more affordable. A shorter-term loan may be the better fit if a higher monthly payment doesn’t strain your finances. You'll get a lower rate and pay back your debt sooner. 

Compare Interest Rates and the Total Cost of the Loan

You pay interest and fees when you borrow money. The higher the interest rate, the more expensive your personal loan becomes. So, if you are trying to keep costs down, pay close attention to the different rates for short-term and long-term loans.

Some lenders charge origination and administrative fees to process your personal loan. To better understand the personal loan’s cost, compare the annual percentage rate (APR) for short-term and long-term options. When borrowing money, the APR represents your yearly cost (interest and fees). 

Compare Loan Offers From Different Lenders

To find the best personal loan for your financial situation, review and compare loan offers you get from various lenders. You may be able to prequalify with some lenders. So, you can see what rates and terms may be possible without dinging your credit. 

Pay close attention to the amount, loan length, interest rate, APR and prepayment penalties when comparing offers. 

When Do You Decide Your Loan Term?

When you submit your application, you'll tell the lender how much you hope to borrow and how long you'd like to pay off the loan. If the lender approves your application, they'll tell you the interest rate they're willing to offer you.

Once you accept the terms terms that are offered, you can't get a new interest rate unless you refinance.

How To Get a Personal Loan

You can apply for a personal loan from an online lender, bank or credit union. Regardless of your lender, you must complete an application and submit requested documents, such as a W2 or paycheck stubs.

FAQs

Can I change the term length of my personal loan after I’ve already chosen it?

Changing the term length of your personal loan can be difficult after you have signed the agreement. However, if you are experiencing financial hardship, the lender may be willing to do a loan modification to extend the length of your loan and lower your monthly payment. 

How does my credit score impact the personal loan term length I should choose?

People with lower credit scores might get higher interest rates than those with higher credit scores.

Can I pay off a personal loan early if I choose a longer term length?

You can pay your personal loan off early if your lender doesn’t prohibit it in the loan agreement. However, you could be penalized for paying off your loan early.