Is a longer personal loan term always better?

Personal loans can be a very flexible borrowing option. You can use them for almost anything. For example, you could get a debt consolidation loan, or use the funds for a big purchase or home improvement project you want to pay off over time.

But that flexibility means you also have choices to make when you apply for a personal loan. One of the most important is what type of repayment term you want.

Personal loans with longer terms usually have smaller monthly payments. That can make these loans appear more affordable, so you might assume a longer personal loan term is better than a shorter one with larger monthly payments.

It's not so cut-and-dried. As with most things, the answer is often somewhere in the middle.

Why longer loan terms look attractive

Longer loan terms often seem 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 your 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 means you're paying interest charges 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 much longer. That means more interest payments, which adds up to a lot over time.

When a longer loan term might make sense

If a shorter term is less costly overall, is it always the right pick? Not necessarily. A longer loan term could be the right way to go if you need more flexibility in your budget.

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 best 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. You could put that freed-up cash toward building an emergency fund or covering everyday expenses.

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.

A shorter term saves you money because you pay down the principal faster, so less interest builds up over time. Shorter terms also tend to come with lower interest rates than longer ones, according to Federal Reserve data on consumer credit.

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.