Is a longer personal loan term always better?

Personal loans can be a very flexible borrowing option. When you get a personal loan, you can use it for almost anything you want. For example, you could get a personal loan to consolidate debt, or use your personal loan for a big purchase or home improvement project you want to pay off over time. 

When you apply for a personal loan, you have a few choices to make. One of the most important is what type of repayment term you want. 

Personal loans with longer terms usually have smaller monthly payments. Since these loans seem more affordable, it's natural to wonder if a longer personal loan term is always better. As with most things, the answer is somewhere in the middle. Let's take a deeper look.

Why longer loan terms look attractive

Longer loan terms often seem much more attractive because the monthly payments are lower. That could make the loan more affordable in the short term since it's easier to fit into the budget. This could be especially important if you are looking for a loan to consolidate debt because you have been facing financial hardship.

The downside to a longer loan term is that it also means you're paying interest for longer. You may also have to pay interest at a higher rate, since loans with longer payoff timelines are riskier for lenders. These factors can both lead to a more expensive loan by the time you've paid it off.

The hidden cost of stretching out your loan

The longer you pay interest and the higher your interest rate, the more expensive your loan will be overall. That means there could be a steep price to pay for prioritizing lower monthly payments.

The table below shows an example of how the cost of a loan could differ based on the length of the repayment term. The table assumes you are borrowing $10,000 and have the same 16% rate for all loans. 

The shorter loan has much higher monthly payments, but the total cost is significantly lower. With the longer loan, while you are paying a lot less each month, you have to make those payments for many more years. That means many more interest payments, which adds up to a lot over time.

When a longer loan term might make sense 

As you compare loan term options, you may find that a longer loan term makes sense in some situations. Most often, a longer loan term could be a good option if you are struggling with covering all your monthly costs. 

For example, if you get a debt consolidation loan with the goal of reducing your monthly debt payments, a longer loan term could be the right move. A higher overall cost in exchange for the wiggle room in your budget now could be worth it if it helps you reach your financial goals.

Choosing a loan with a longer term could also make it easier to qualify to borrow. Lenders don't want to give you a loan if the monthly payments would eat up too large a percentage of your income. The longer loan term with the lower payment may be the only one you qualify for. 

Since refinancing personal loans could be an option, you might consider getting the loan you are eligible for now and refinance to one with a shorter term later. Or, if you choose a loan with no prepayment penalties, you could pay off your loan early to avoid some of the extra interest costs. 

When a shorter loan term could save you more 

If you can afford to make higher monthly payments, you should almost always choose a loan with a shorter term. You could reduce the total interest costs and pay off the debt faster, giving you more room in your budget to do other things later.

Just be sure the payments truly are affordable by running the numbers for your budget and emergency fund. In your desire to save, you don't want to put yourself at risk of not being able to make payments at all by choosing too short of a term. 

What's next: Find the term that fits your goals

There is no one-size-fits-all answer when you're picking a personal loan term. It's about balancing an affordable monthly payment with the lowest possible overall loan costs. 

Prequalification could show you what kind of loan terms and fees you can expect without hurting your credit. Compare options across a few lenders to decide which is best for your goals. Not sure where to start? Check your rates with Achieve Personal Loans today to begin your loan search.