Why a personal loan with a longer repayment term might be a better choice
Why a personal loan with a longer repayment term might be a better choice
Two people are looking at their bills while sitting on the sofa in their living room.

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Your choice of loan terms will impact your finances, so make sure you find the right one for you.


Key points

  • When you take out a personal loan, you have the choice between several repayment dates.
  • Longer repayment terms can be more costly over time.
  • However, a longer repayment period might make sense if its lower monthly payments help you balance your financial needs.

If you take out a personal loan, you will have to make some big decisions. One of the most important is the repayment term of your loan.

In many cases, opting for a shorter repayment period makes your loan cheaper, but there may be times when you want to consider a longer repayment term. Here’s why taking longer to pay off your loan can sometimes be the best financial choice.

When does it make sense to take out a personal loan with a longer repayment schedule?

Taking a personal loan with a longer repayment term is the best choice in situations where you need your monthly payments to be lower. You see, when you reduce the time it takes to pay off your debt, you save money in the long run. But the price of these savings is that each monthly payment increases, sometimes dramatically.

Here is an example of a $10,000 loan over five years:

Amount of the loan

$10,000

term of the loan

5 years

Interest rate

6%

Monthly payment

$193

Total interest

$1,599.68

Source: author’s calculations

Now, here’s an example of a $10,000 10-year loan:

Amount of the loan

$10,000

term of the loan

10 years

Interest rate

7%

Monthly payment

$116

Total interest

$3,933.02

Source: author’s calculations

In the first example, your estimated monthly payment would be $193 and your total interest over time would be $1,599.68. In the second example, your monthly payment would only be $116, but you would end up with interest charges of $3,933.02 over time.

Now, in an ideal world, you would want to take out the loan that costs you the least amount of interest. But this loan would also cost you about $77 more per month.

Sometimes finding that extra $77 can be undesirable, if not impossible. And if so, you better go for the loan with the longest repayment term, even if it will cost you more in the end.

Here are some scenarios where you might want a longer payment term:

  • You are afraid of failing. If you think you might not be able to cover the higher payment or that paying it would make it difficult to meet other financial goals, you might want to go with the lower monthly payment on your loan.
  • You have other debts with higher interest rates. If you have credit cards or other debt at a much higher rate than the personal loan, a longer repayment term with a lower monthly payment would generally make more sense. You better spend your extra money on that more expensive loan to pay it off faster.

Find the right size for you

It’s important to remember that even if you choose the loan with the longest repayment time, you still have the option of making larger payments when you can afford it. This could help reduce the extra interest charges you incur and make winnings cheaper, provided you make sure you aren’t going to be hit with prepayment penalties.

The key is that the longer repayment term could provide the flexibility you need if you need to take out a personal loan and are worried that higher monthly payments could lead to financial hardship.

The Ascent’s Best Personal Loans for 2022

The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.

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