What Are Common Personal Loan Term Lengths?
Personal loans typically have terms between one and seven years, but they can vary depending on the lender. The term is the amount of time you have to make payments. It can significantly impact the size of your monthly payment and how much you pay toward interest fees.
Short-term loans have higher monthly payments due to the condensed repayment period. Medium-term loans have a slightly longer term length of four to five years. The perk of shorter loan terms is that you’ll pay less interest overall. For example, imagine you have a $10,000 personal loan with 5% interest and a two-year term length. Your monthly payment would be $438.71 and you would pay $529.13 toward interest fees.
If the same loan extends to a five-year repayment period, your monthly payment will decrease to $188.71. But the interest charges you pay would increase to $1,322.74. With a long-term loan that extends beyond six years, the monthly payments would decrease even further, but interest charges would continue to grow.
How To Choose the Right Personal Loan Term Length
The best personal loan term length depends on your finances and circ*mstances. Finding a balance between manageable monthly payments and minimal interest charges is crucial. Here are some factors to consider.
Assess Your Financial Goals and Budget
As you consider the best terms for a personal loan, it’s a great time to review your budget and financial obligations. Personal loans are installment loans, meaning you have fixed monthly payments. Consider how a new monthly expense might fit your current budget.
Your income and expenses can provide a straightforward way to determine which term length works best. For example, imagine your take-home pay is $5,000 per month, and your monthly expenses are $4,600. That means you have an additional $400 left over each month. Your personal loan payment shouldn’t exceed that amount unless you plan to decrease spending elsewhere.
Consider the Loan’s Purpose
Borrowers can use personal loans for nearly any expense, including weddings, home renovations, medical expenses and debt consolidation. How you plan to spend the money can help determine the best term length.
If you intend to use the money to pay for wedding expenses, the loan payments will cause your monthly spending to increase. In that case, you might prioritize a medium- or long-term length with lower monthly payments to minimize the impact on your budget. However, your monthly expenses might decrease if you plan to use the funds to consolidate debt and secure a lower interest rate. Because of that, you might be able to afford a shorter term with higher monthly payments.
Evaluate Your Ability To Make Payments
As you select a term length, the goal is to balance affordable monthly payments and minimal interest charges. But it’s essential to be realistic about what you can manage. Opting for a long-term loan might make more sense if you can’t comfortably afford a higher monthly payment. The consequences of falling behind on payments can offset potential savings.
If you miss payments, it can negatively impact your credit score. You might also have to pay late fees, which can add up quickly, or deal with third-party debt collectors. Even though extending your debt repayment is usually not ideal, it might make more sense in some circ*mstances.
Factor in Potential Life Changes
Whether you’re planning a cross-country move, switching careers or welcoming a new child, your life changes can significantly impact your finances. Consider upcoming life events as you determine the best term length for a personal loan.
If there’s a big move on the horizon, for example, factor in moving costs and the impact those expenses will have on your ability to afford loan payments. Or maybe you know you’re due for a scheduled salary increase and can count on a raise soon, increasing your budget. Take time to evaluate upcoming changes as you find the loan term that’s the best fit.
Which Personal Loan Term Length Is Right for Me?
The best loan term length depends on your finances, goals and monthly budget. There are benefits and drawbacks to both short-term and long-term loans.
A short-term loan is an excellent choice if you can comfortably afford higher monthly payments and want to pay off debt fast. But depending on your circ*mstances, higher payments might mean you need to make temporary sacrifices in other areas of your budget and scale back on spending while you repay the loan.
For some borrowers, medium-term loans with three to five-year repayment periods offer the best of both worlds — manageable payments and reasonable interest charges. If you want to minimize the repayment timeline but need slightly lower monthly payments, this term length might make the most sense.
Short or medium-term loans could make the most sense in the following situations.
- You can afford bigger monthly payments: If there’s room in your budget for a larger monthly payment, a short-term loan might be the right fit.
- Debt payoff is your top priority: You may need to make financial sacrifices to afford a higher loan payment. It might be worth it if your goal is to become debt-free as soon as possible.
- You want to minimize interest charges: A short-term loan helps ensure you pay as little interest as possible. The shorter the term, the less interest you pay.
Long-term loans with term lengths of six years or more can offer flexibility with lower monthly payments. The downside? You’ll pay significantly more toward interest. If you opt for this term length, check if the lender charges prepayment penalties for paying off the loan early. If there aren’t any, you can pay the loan off early if your circ*mstances change, and you won’t accrue any fees for doing so.
Long-term loans might be a better fit if you find yourself in any of these circ*mstances.
- You need lower monthly payments: A long-term loan could make sense if your budget cannot accommodate a large monthly payment.
- Flexibility is most important: If you opt for a long-term loan with lower monthly payments and no prepayment penalty, you have maximum flexibility — smaller payments and the ability to pay it off early without charges.
- You have other financial priorities: If you’re juggling various financial obligations and goals, a long-term loan might be better for your current circ*mstances.
How To Get a Personal Loan
Once you’ve evaluated your finances, it’s time to apply for a personal loan and finalize the process. Expect the process to include the following steps.
Check Eligibility and Gather Documentation
Before you begin applying for a loan, gather documentation and prepare for the application process. Lenders typically require:
- Proof of income: Some lenders utilize an online verification process, but you typically need to provide recent pay stubs or bank statements.
- Proof of identity: You usually need a government-issued ID to finalize your loan application. Lenders accept driver’s licenses, passports or state-issued identification cards.
- Proof of address: Lenders need to verify your address. Acceptable forms of documentation include utility bills, mortgage statements and lease contracts.
It’s also a great time to check your credit report for errors or discrepancies. You can request a free copy of your report at AnnualCreditReport.com.
>> Related: Learn more about the documents required for a personal loan
Research and Compare Lenders
Once you’ve gathered the necessary documentation, you can compare lenders. There are three types of lenders: online lenders, banks and credit unions. If you’re already a bank or credit union customer, that might be a great place to start. You could also include some of the top online lenders in your shortlist.
Research potential lenders and review a handful of offers before you decide. It’s difficult to determine if you have a competitive loan offer unless you have other offers to compare it to.
>> Related: Online vs. In-Person Loans
Prequalify and Undergo Credit Check
After narrowing down your list of potential lenders, you can start the prequalification process, which allows you to review loan offers without undergoing a hard credit check. Not all lenders offer prequalification, so be sure to clarify before you complete the process, especially if you want to minimize hard credit checks, which can temporarily decrease your credit score.
The prequalification process is typically fast and straightforward. You’ll usually need to provide your Social Security number, address, income and estimated loan amount. The lender will then review your information, complete a soft credit check and provide prequalification offers.
>> Related: How to Prequalify for a Personal Loan
Review Loan Offers and Terms
Review the terms and conditions once you have prequalification offers from your top lenders. Consider the interest rate, term length and monthly payment amount.
Some lenders offer different interest rates for different term lengths, so read the offer’s details and ask questions if you have any. It’s also an ideal time to ask about potential fees, including prepayment penalties and origination fees, which are a percentage of the loan amount.
>> Related: What Is a Good Interest Rate on a Personal Loan?
Finalize the Loan Agreement
Once you know your preferred lender, it’s time to submit an official loan application and finalize the agreement. During this step, you must provide the documentation you gathered at the beginning of the loan application process, including your proof of income and proof of identity.
Depending on the lender, finalizing the loan can take a few hours or a few business days. Once the loan application is complete, you’ll receive the funds. You might just need to allow for processing time while the money is transferred.
The Bottom Line
There’s no right or wrong answer regarding the best term length, but there’s usually an option that makes the most sense for your circ*mstances. Consider the implications of a loan agreement and compare offers from multiple lenders. Regardless of the term length, loans impact your finances and monthly cash flow.
There are benefits and drawbacks to every financial decision, including term lengths. The longer you repay your loan, the more you’ll pay toward interest. But the perk is that your monthly payments will be smaller. A shorter loan term means you’ll be debt-free faster and pay less interest. But the drawback is that you have to commit to larger monthly payments. To make an informed decision, take time to review your budget, assess your goals and ask questions throughout the application process.
Frequently Asked Questions about Personal Loan Term Length
It may seem like lenders would prefer longer loan terms due to the higher total interest fees. But longer loan terms can be risky for lenders. Personal loans often have a fixed interest rate, meaning it does not change throughout the loan term. Lenders could lose potential earnings if interest rates rise during that time because the borrower’s rate is locked in.
Borrowers with long-term loans pay more interest due to the extended repayment term length. For example, a $5,000 loan with 5% interest and a six-year term length equates to $797.78 paid toward interest. But the same loan with a two-year term length would only cost $264.57.
Short-term loans with one or two-year repayment periods come with high monthly payments. Because you’re paying the money back quickly, the payments are higher. You could fall behind if you overestimate your ability to make the payments. If that happens, it could negatively impact your credit score and lead to fees or wage garnishment.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someoneyou trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
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