A loan shopper looks at multiple loan terms

How To Choose the Best Installment Loan Term Length

Published on: August 7, 2024

If you've ever found yourself in need of extra cash, you know how much stress that can bring on. You're living life paying your regular bills and then something pops up unexpectedly that doesn't quite fit in your budget. An installment loan can help fill in that gap in your finances. But how long of a term should you choose to pay it back?

You should choose the best installment loan term length to fit your specific needs. You must consider your budget, your financial goals, what you need the loan for, and how much you're borrowing. The final decision on a loan term is decided by the lender, however, you get to choose from the terms they can offer. Make sure you think about what a shorter- or longer-term means for your payments and more.

Key Takeaways

Choose a loan term length that aligns with your financial situation. Shorter terms mean higher monthly payments but lower total interest, while longer terms offer lower payments but higher overall interest. Assess your budget to find a term that balances affordability with cost-effectiveness.
Match the loan term to the purpose and size of the loan. For quick, small needs, a shorter term may be ideal. For larger, long-term investments, a longer term provides flexibility in managing payments.

What Is a Loan Term Length?

The loan term length refers to the total duration you have to repay the loan in full. This period is crucial as it determines the schedule and amount of your repayments, and it can vary significantly depending on the type of loan and its purpose.

Loan Type	Typical Term Length	Details
Mortgage Loans	15 to 30 years	Long-term loans for real estate purchases. Longer terms mean lower monthly payments but more total interest paid.
Auto Loans	3 to 7 years	Medium-term loans for vehicle purchases. Shorter terms result in higher payments but less total interest. Longer terms reduce monthly payments but increase overall interest.
Student Loans	10 to 20 years	Loans for educational expenses. Federal loans often have fixed 10-year terms, with some plans extending repayment based on income. Private loans may vary.
Personal Loans	1 to 7 years	Loans for various personal needs. Shorter terms have higher payments but lower total interest, while longer terms offer lower payments and higher overall interest.
Quick Cash Installment Loans	3 to 18 months	Short-term loans for immediate cash needs. Typically repaid in monthly installments with higher interest rates due to the shorter term.
Payday Loans	1 to 2 weeks	Very short-term loans are intended for repayment by the next paycheck. Often comes with high costs and fees due to the brief repayment period.

Mortgage Loans, Typically Range from 15 to 30 Years

Mortgage loans are generally long-term loans used to purchase real estate. Due to the substantial amount of money involved and the long-term nature of property ownership, mortgage terms are extended to make monthly payments more manageable. A 30-year mortgage, for example, allows for lower monthly payments spread over a longer period, while a 15-year mortgage accelerates repayment and usually results in less interest paid over the life of the loan.

Auto Loans, Typically Range from 3 to 7 Years

Auto loans are medium-term loans specifically for purchasing vehicles. The term length can affect the monthly payment amount and the total interest paid. Shorter terms lead to higher monthly payments but lower total interest, whereas longer terms offer lower payments but may result in higher overall interest.

Student Loans, Typically Range from 10 to 20 Years

Student loans are designed to help cover educational expenses. Federal student loans often come with fixed terms of 10 years, though income-driven repayment plans can extend this period. Private student loans may offer varying terms based on the lender's policies.

Personal Loans, Typically Range from 1 to 7 Years

Details: Personal loans can be used for various purposes, from debt consolidation to home improvements. The term length affects both the monthly payment amount and the total interest paid. Shorter terms have higher monthly payments but lower interest costs, while longer terms offer more manageable payments but higher total interest.

Online Installment Loans, Between 3 and 18 Months

These loans are short-term and designed to provide quick access to cash. They are repaid over a relatively short period, with payments often made monthly. Due to the short term, these loans can have higher interest rates compared to longer-term loans.

Payday Loans, Typically 1 to 2 Weeks

Payday loans are very short-term loans intended to bridge the gap until your next paycheck. They are often repaid on your next payday, which means they usually come with very high costs and fees. The short repayment period can lead to a cycle of debt if not managed carefully.

Each type of loan has its unique term length suited to its purpose, and understanding these terms helps in making informed decisions about borrowing and managing debt. The choice of loan term can impact your overall financial strategy, affecting monthly payments, total interest costs, and your financial flexibility over time.

When To Choose a Shorter-Term Loan

First, choose a shorter-term loan when you can afford the payments. If it's not going to keep you from paying your bills, why not pay the loan off faster?

It's also good to choose a shorter term when the longer term is going to cost you a lot more in interest. In terms of a mortgage, you could save tens of thousands or even hundreds of thousands of dollars in interest throughout the loan by choosing the shorter loan term length.

If you know you have tighter financial times coming, choose the shorter loan term. You can get the loan paid back before your budget changes.

When to Choose a Longer-Term Loan

You can choose a longer-term loan when you need lower payments. This may mean you'll pay more in interest over time but it can help you afford the loan at the time you need it.

Choose a longer loan term when you need to borrow more money. Smaller loans can be paid off quickly in many situations. When you're looking at a bigger house that you could afford if you went with the longer loan term, then choose it.

You may want to go with a longer-term loan when someone is going to stop working soon that contributes financially to your household. This may help you stay away from digging into your savings and give you lower payments that will continue to fit into your budget even without the secondary income.

Choosing the Best Loan Term for an Online Installment Loan

The best loan term length for you should be based on your needs. You need to look at things from all angles when it comes to your finances. Consider the money that goes out every month, what comes in, and future outflows, as well. Once you've looked at the whole picture, you can make a good determination for the best loan term.

Evaluate Your Ability to Make Payments

Assess monthly budget. Start by reviewing your monthly income and expenses. Determine how much you can comfortably allocate towards loan repayments without straining your budget. A longer loan term typically results in lower monthly payments, which can ease your financial burden.
Balance payments and term length. While longer terms lower your monthly payment, they often increase the total interest paid over the life of the loan. Conversely, shorter terms result in higher payments but less total interest. Aim for a term length that balances manageable payments with reasonable total interest costs.
Avoid financial strain. Choose a loan term that ensures your payments remain affordable. Avoid selecting a term that could stretch your finances too thin, potentially leading to missed payments or financial stress.

Assess Your Financial Goals and Budget

Align with savings goals. Consider your short-term and long-term financial goals. If you have specific savings targets or other financial milestones, ensure the loan term length aligns with these objectives.
Debt management. Take into account any existing debts and your plan to pay them off. A loan term that fits within your overall debt repayment strategy will help maintain your financial stability.
Future expenses. Factor in anticipated future expenses such as upcoming bills, major purchases, or life events. Select a loan term that accommodates these potential costs without compromising your financial goals.

Consider the Loan's Purpose

Purpose of the loan. Reflect on what you’re using the loan for. If the loan is intended for a short-term need or an emergency, a shorter term may be appropriate. For larger purchases or long-term investments, a longer term may provide more flexibility.
Expense duration. Match the loan term to the duration of the expense being financed. For example, if you’re financing a home renovation, that provides long-term value, a longer loan term might be suitable. Conversely, for short-term needs, a shorter term could be more practical.

Factor in Potential Life Changes

Anticipate life events. While it’s impossible to predict every life change, consider any known future changes that might affect your financial situation. This includes potential increases or decreases in income, new expenses, or significant life events.
Plan for flexibility. Choose a loan term that offers some flexibility to accommodate changes in your financial situation. Opting for a term that aligns with your anticipated circumstances can help you avoid financial strain and ensure timely repayments.

What Is a Common Personal Loan Term Length?

Personal loan term lengths can vary significantly depending on the lender, the type of loan, and the borrower's credit profile. However, most personal loans typically fall between 3 months and 5 years. This range provides a balance between manageable monthly payments and the total interest paid over the life of the loan. Borrowers can choose a term length that best aligns with their financial situation and repayment capacity.

How Term Length Affects Installment Loans

The term length of an installment loan has several critical impacts on the loan's overall cost and your repayment experience:

Monthly Payment Amount

The length of the loan term directly affects your monthly payment. Longer-term loans typically result in lower monthly payments, making them more manageable for your budget. Conversely, shorter-term loans come with higher monthly payments, but the overall repayment period is reduced.

Total Interest Paid

The interest rate on a loan remains a major factor, but the term length also plays a significant role in determining the total interest paid. Longer terms generally mean more interest accrues over time due to the extended repayment period. Even with a lower interest rate, the cumulative effect of prolonged interest compounding can lead to significantly higher total interest costs. Shorter terms minimize the time interest has to accumulate, thus reducing the total interest paid.

Qualification Requirements

Lenders often impose stricter qualification criteria for shorter-term loans. This is because shorter-term loans require higher monthly payments, which demand a more stable and higher income to qualify. On the other hand, longer-term loans are usually more accessible but come with the trade-off of higher overall interest costs.

How to Choose Between Shorter and Longer Loan Terms

When deciding between a shorter or longer loan term, it’s essential to weigh your financial situation and goals.

Opting for a Shorter Term

Financial benefits. If your budget allows, choosing a shorter loan term can be advantageous. Shorter terms typically result in lower total interest costs, as the loan principal is repaid more quickly and interest has less time to accrue.
Debt management. Paying off the loan sooner can be beneficial for your overall financial health, as it reduces your debt burden and allows you to allocate funds towards other financial goals sooner.

Opting for a Longer Term

Financial flexibility. If you need lower monthly payments to fit your budget, a longer loan term might be the better choice. It can provide more flexibility in managing your monthly expenses and improve your cash flow.

While a longer term can make monthly payments more affordable, it generally means paying more in total interest over the life of the loan. Evaluate whether the trade-off of higher overall interest costs is acceptable given your financial situation and goals.

Ultimately, the choice between a shorter and longer loan term should align with your financial capacity, goals, and the specific benefits and drawbacks of each term length. Carefully consider your ability to manage payments, your overall debt strategy, and the impact on your financial future when making your decision.

The Best Loan Term Depends On You

The bottom line here is that choosing the best loan term length is all about you. It's about what you need and how it fits into your financial picture. You need to consider your budget, what changes could be coming, what you're using the loan for, and what your goals are. Don't put yourself in a position that makes it hard to meet your financial obligations.

Use these tips and guidelines to set yourself up for success. Let us help you find the right loan term for your specific needs.