Personal Loan Term Length: Which Is the Best To Choose?

Personal loans can be a helpful tool if you need to consolidate debt or pay for that beautiful new kitchen you’ve always wanted. But did you know that your personal loan term length has a huge influence on how much you pay every month and over the life of your loan?

Let’s see how term lengths shorter or longer than the typical 2 – 5 years can affect your decision on the best personal loan for you.

How Long Are Personal Loan Terms?

Your personal loan term length can vary anywhere from 2 – 5 years and even up to 7 years depending on the lender and your loan amount. Loan terms shorter than 2 years or longer than 5 years have several benefits but also some downsides compared to each other. Let’s take a look at both to see which is best for you.

Short-Term personal loans

A short-term personal loan is typically an unsecured loan that you must repay in 24 months or less after receiving the loan. While this may sound like a long time if you have urgent bills to pay, it’s critical to look into the details of the loan and your personal finances to ensure you can pay it back during that time period.

Two years or less to repay a loan can put quite a strain on your finances. With such a short term length, you will need to make larger payments every month to pay it back on time. This aggressive timeline can make it harder to make payments on time which makes the loan riskier for lenders. To make up for this added risk, lenders may only approve you for a lower loan amount than they would with a longer term length.

On the other hand, short-term personal loans can be a powerful tool to get the money you need quickly while saving money on interest payments throughout the life of the loan. While the monthly payments may be steeper, you will pay more toward the principle of the loan than toward interest payments. So, at the end of the term, you will have paid less on interest than with a standard personal loan. As an added perk, short-term loans are generally less likely to have prepayment penalties, but this will depend on your lender and the specifics of your loan agreement. 

Long-term personal loans

A long-term personal loan is typically an unsecured loan that you have to repay in 5 years or longer. The primary benefit of a long-term personal loan is that you will have lower monthly payments throughout the life of your loan. However, that doesn’t mean long-term loans are the cheaper option. It’s actually the opposite. Since you will make more payments over time, you will also pay more in interest over time. 

So overall, a long-term loan costs more money than a short-term loan. Many lenders don’t offer long-term personal loans, so it may be harder to find one that fits your needs. If you do find a lender that offers long-term loans, they can be more difficult to qualify for than short-term loans. 

However, long-term personal loans can be a better option than short-term loans or other forms of debt. The lower monthly payments make them easier to manage when planning your finances. They also offer larger loan amounts, so if you have an expense that a short-term loan won’t cover, a long-term loan could get you the funds you need. Finally, you will typically get a better interest rate than a credit card, making them a good option if you need to consolidate high-interest debt. 

Short-Term Vs. Long-Term Personal Loans: A Comparison

	Short-Term	Long-Term
Use of Funds	No difference	No difference
Total Interest Paid	Less interest paid overall	More interest paid overall
Monthly Payments	Higher monthly payment	Lower monthly payment
Prepayment Penalty	Less likely	More likely
Lender Fees	No difference	No difference

3 Tips for Choosing the Best Personal Loan Length

Follow these steps to find the right personal loan terms for you:

1. Evaluate your current and future finances

The best personal loan term length depends on the strength of your finances today and for years to come. To evaluate your current finances, check your credit score and debt-to-income (DTI) ratio to determine whether you’re able to take on more debt right now. Also, evaluate your income and job security to determine whether you can consistently make the loan payments for years to come. This evaluation should give you the details necessary to decide what term length is best for you.

2. Determine your monthly payments

Once you have your finances organized, calculate how much you can afford to pay every month toward your loan repayments. If you have the ability to pay more every month so you can pay less overall, a short-term loan may be best for you. If you need to pay less every month or need a larger loan, a long-term loan may be the better option.

3. Shop around for rates

Now that you have all of your personal information prepared, you’re ready to shop around for the best interest rates. Lenders will also have different fees and loan structures that are important to compare. The annual percentage rate (APR) of a loan combines interest rates with lender fees to boil the cost of the loan into one number, making different loans easier to compare.

Personal Loan Term Length FAQs

Here are some of the most common questions about personal loan term lengths.

What is the average length of a personal loan?

Personal loan term lengths are typically between 2 to 5 years. A loan with a term shorter length is considered a short-term loan, while a loan with a term over 5 years is considered a long-term loan. 

Can I change my personal loan term length after approval?

Typically, you can’t change your loan term without refinancing. Whether you can refinance your personal loan to extend the term length is up to your lender. If the lender approves your refinance, you may get a better interest rate and make smaller monthly payments, but you will likely have to pay more interest over the life of the loan.

How do I determine which personal loan term is right for me?

Evaluate your finances to determine the maximum monthly payments you can afford to pay off the loan. This should determine whether a long-term or short-term loan is right for you. Once you’ve decided on your term length, shop around for lenders to get the best rates possible. 

Final Thoughts on Determining Your Personal Loan Term Length

Ultimately, which personal loan term you decide to apply for depends on your financial situation. If you want to pay less interest overall and have a plan to manage higher monthly payments, a short-term personal loan may be best for you. If you need to spread out your payments over time and are okay with paying more in interest, a long-term loan may be your best option.