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How long should my loan term be?

Your loan term affects your monthly repayments and how much you pay back overall. So, how do you choose your loan duration? Read on to find out.

In This Guide:

What is a loan term?

When you take out a loan, you’ll decide how long you need to pay it back. This is called a loan term. If you’re looking to take out a personal loan, terms are typically between one and ten years, although there are exceptions.

Just to note, it’s possible to get loan terms of up to 35 years, but these would be secured loans, not personal ones. The difference is that your loan is secured against an asset, such as your house.

How does loan duration affect interest rates?

The general rule of thumb is that the longer the loan term, the lower the interest rates. Each month, you’ll pay back a portion of your loan with added interest. So, with repayments made over a longer period of time, lenders offer lower rates because they’ll make money on the interest you owe for much longer.  

By contrast, with shorter loan terms, the lender has less time to make money through interest, so they pump up the rates to be sure they do.

Now, let’s take a look at these two types of loans in more detail.

Loan Duration: Short Term vs Long Term Loans

A loan is generally considered short-term if the term is up to a year. There are a few upsides to short-term loans, first and foremost being that you’re in debt for a much shorter period of time. While you tend to get much higher interest rates, you’ll still pay back less overall than with an increased loan term, as interest has less time to accrue. So, you save money in the long run.

However, you’ll have higher monthly repayments which will have a greater impact on your budget. They can be harder to qualify for and, in fact, deals often aren’t that competitive. That being said, if you do opt for a short-term loan then make sure you run a loan comparison with us to ensure you get the best deal you can.  

By contrast, long-term loans have their advantages by being friendlier on the budget. Your monthly repayments are much lower, as are interest rates. While this may be true, be aware that a long-term loan won’t be cheaper than a short-term loan overall. Yes, the payments are more manageable but what you pay back on the whole will be higher. Additionally, you’ll be in debt for longer.

It’s important to think carefully about your needs and budget when you compare loans; look out for the total repayable sum, not just the rate of interest.

What to Consider when Choosing Your Personal Loan Length

Traversing the world of loans without a map is no fun for anyone. We’ve put together a few things to look out for when you run your loan comparison, so you can choose the right loan length for your needs.

  • Interest rate – this will be advertised as an APR%, which is how much interest you would pay back over a year. Loans with terms less than a year will still show interest rates as an APR, which is why they can sometimes seem alarmingly high. Still, cheap loans will have lower interest rates, so you’ll want to look out for those.
  • Look for the total repayable sum – if APR and interest rates feel a bit complex to get your head around (you’d be forgiven!) then look at the total repayable sum instead. This’ll show you exactly what the cost of the loan is overall, including interest and any fees.
  • Additional fees and costs – most lenders will charge some sort of administration fee. It could well be included in your interest rate, but it’s worth taking a look. And on that point, keep your eyes peeled for whether you’ll be charged early termination fees for paying off your loan early. Most lenders do, but you could strike lucky.
  • Your credit rating – it’s useful to be aware of your credit rating and what that means for loan applications. Typically, the best loans are for those with strong credit scores, but that doesn’t mean you can’t get one with bad credit. Although, do factor a credit check into your processing time…
  • Processing time – the majority of online lenders approve loan applications on the same day. However, if you’re applying to a bank or a credit union it could take longer, so consider this when searching to be sure you get your funds when you need them.
  • Extra incentives – don’t forget to look out for additional incentives or perks. Many lenders will offer lower rates if you agree to set up automatic payments or apply online.
  • The small print – as always, read the small print. If a deal seems to good to be true, it probably is.