When you take out a loan, each lender has a different timeline for you to consider. Some may require you to pay off the total within a year or two. On the other hand, some lenders may give you the flexibility of stretching out the loan over a 10-year period. This could change how much you pay each month and overall, among other factors.
Affects Your Interest Rate
If you choose a loan with a shorter term, you tend to pay more monthly than you would if you extend its lifespan. This is why short-term loans are less desirable. A long-term loan tends to come with a lower interest rate.
Impacts Your Monthly Payment
Let’s say you take out a $15,000 loan at a 6% interest rate for a 48-month term. You’ll pay $352.28 per month. If you have a loan with the same interest rate for a 72-month term, you’ll pay $248.59 per month.
Moreover, your interest rate may change depending on the length of your loan, and you may need to take out a higher amount to qualify for a longer term, both of which can impact your monthly payment.
Changes Your Total Over Time
The repayment timeline you receive affects how much you pay in interest, which means you could possibly pay more on the same amount if you choose a longer term, though you’ll pay less each month.
We’ll use the example of $15,000 from above. If you opt for a shorter term, your interest rate may be lower. However, if you extend the life of that loan and have a higher interest rate, you may pay more overall.
For instance, you’ll pay $1,909.22 in interest alone if that loan must be repaid in 48 months. While you pay less monthly on that same loan if you extend its length to 72 months, you’ll pay $2,898.72 total in interest.
You must also consider that you may need to take out a larger loan, which will also increase how much you spend in interest.
Influences Whether You Qualify or Not
It’s easier to qualify for a loan with a shorter term than it is for one with a longer term. For example, your credit score may not need to be as high to receive a shorter term. Therefore, you may qualify for a short-term loan but not a longer one.
Determines Whether You Can Take Out Other Lines of Credit
If you want to take out a car loan or mortgage while you have a personal loan, the lender will consider your debt-to-income ratio. A high amount of monthly debt could limit how much you can take out or may disqualify you completely from any other lines of credit.