Best Personal Loan Term Length

A personal loan can be a useful way to handle unexpected costs like car repairs, medical expenses, or other financial needs. Don’t focus solely on the annual percentage rate (APR) while comparing options, which includes both interest and fees.

Equally important is the personal loan term length- the duration over which you’ll repay the loan. This not only affects your monthly payments but also decides the total interest you’ll end up paying. Here’s how to decide on the right loan term for your specific financial circumstances.

One main decision when applying for a personal loan is choosing how long you want to take to repay the borrowed amount. This is known as the loan term. Normally, the loan term aligns with the size of the loan- larger loans tend to have longer repayment periods, while smaller loans may be paid off in a shorter time, sometimes in less than a year. Lenders generally offer flexible repayment terms that can range from just a few months to several years.

Here are some common examples:

• Under 1 year: Ideal for smaller, urgent costs like a $500 medical bill or car repair
• 1–2 years: Suitable for modest expenses, such as buying $3,000 worth of furniture
• 3–4 years: Good for mid-sized needs like consolidating $15,000 in debt
• 5–7 years: Best for significant investments, such as a $30,000 kitchen remodel

A long-term personal loan generally refers to a loan with a repayment period of five years (60 months) or more. These loans are issued as a lump sum and come with fixed interest rates, meaning your monthly payments remain consistent throughout the loan term.

Lenders may charge higher interest rates compared to shorter-term loans since the repayment period is extended. The rationale is simple- the longer the repayment period, the greater the risk of default, forcing lenders to offset that risk with increased rates.

Long-term personal loans often allow for larger borrowing amounts, sometimes exceeding $100,000. Borrowers usually consider this type of loan for major expenses like consolidating debt, funding home renovations, or covering significant medical costs.

Personal loans normally fall into two categories: short-term and long-term. A short-term personal loan comes with a quicker repayment schedule, while a long-term personal loan offers more time to pay back the borrowed amount. Each has its own set of advantages and disadvantages, depending on your financial situation and borrowing needs. Here’s an explanation to help you decide which loan term is right for you.

Short-Term Personal Loans

Short-term loans usually come with repayment periods of one to two years or less. These are best for covering urgent expenses and offer quicker access to cash.

Pros of Short-Term Personal Loans

• Quick and Easy Application: Most lenders offer online applications that take only a few minutes to complete.
• Fast Access to Funds: Approval and funding often happen within a day or two.
• No Collateral Required: These loans are usually unsecured, so you don’t risk losing assets if you default.

Cons of Short-Term Personal Loans

• Higher Interest Rates: These loans often come with steep APRs, especially for borrowers with poor credit.
• Lower Loan Amounts: You may be limited to borrowing smaller amounts, which might not cover bigger expenses.
• Extra Fees: Be aware of potential origination fees, late payment charges, and other hidden costs.

Long-Term Personal Loans

Long-term personal loans generally have repayment periods longer than five years. They’re better suited for large expenses and offer more manageable monthly payments.

Pros of Long-Term Personal Loans

• Larger Borrowing Amounts: Best for high-cost needs like home renovations or major medical bills.
• Lower Monthly Payments: Spreading payments over a longer term makes budgeting easier.
• More Lender Options: You’ll find a wide range of lenders offering long-term loans, increasing your chances of finding a competitive deal.

Cons of Long-Term Personal Loans

• Tougher Approval Process: These loans may be harder to qualify for, especially with average or low credit scores.
• Higher Total Interest: As monthly payments are lower, you’ll pay more in interest over time.
• Long-Term Debt Commitment: Being in debt for several years can hinder financial goals like saving for retirement or buying a home.

There are several trusted options to check if you’re searching for a long-term personal loan. Not all financial institutions offer extended repayment terms, but you can still find the right lender by considering the following sources:

1. Traditional Banks

Many national and regional banks offer long-term personal loans to borrowers with good credit. These institutions normally provide competitive interest rates and loan amounts ranging from $5,000 to $100,000 or more, depending on your creditworthiness and financial profile. You may qualify for special terms or lower rates if you have an existing relationship with a bank.

2. Credit Unions

Credit unions are member-owned, not-for-profit organizations that often offer lower interest rates and more flexible repayment terms than traditional banks. Many credit unions provide long-term personal loans to members with fair to excellent credit.

3. Online Lenders

Online personal loan lenders have become a popular option for borrowers seeking fast, convenient access to long-term financing. These digital platforms often offer loan terms of up to 5, 7, or even 12 years, depending on the provider. Online lenders may cater to a broader range of credit scores and financial situations.

4. Loan Marketplaces

Using a loan comparison marketplace is another efficient way to find long-term personal loans. These platforms allow you to compare rates, terms, and lenders side-by-side after completing a single application. Some marketplaces also help match borrowers with partner lenders who are more likely to approve your loan request.

Lenders usually give you multiple term length options when you’re approved for a personal loan. It may be tempting to go for the longest repayment period due to lower monthly payments, but it’s important to understand how loan duration affects your total borrowing cost.

Lower Monthly Payments Can Mean Higher Total Costs

Longer loan terms often come with higher APRs (Annual Percentage Rates), which can significantly increase the total interest paid over time. Although stretching your repayment over several years reduces your monthly burden, it can cost you much more in the long run.

Here’s an elaboration of how different loan terms affect a $10,000 loan:

Picking a 5-year loan may reduce your monthly payment by almost 50% compared to a 2-year loan, but it could also increase your total interest payments more than fourfold. So, while longer terms may seem more affordable on a month-to-month basis, they usually result in significantly higher overall costs.

The term length you choose while selecting a personal loan plays a major role in how much you’ll pay each month and how much interest you’ll pay over time. Longer terms may seem appealing for their lower monthly payments, but they can significantly increase the total cost of your loan. Here’s what to consider when deciding on the ideal loan term for your financial situation.

 1. Evaluate the Loan Amount You Actually Need

Just because you’re approved for a large loan doesn’t mean you need to borrow the full amount. A higher loan amount increases both your monthly payment and total interest costs. Use a loan calculator to assess how much you can comfortably borrow and repay based on different term lengths.

2. Consider the Total Cost of the Loan

Your loan’s overall cost includes more than just the amount you borrow. Interest, fees, and term length all affect how much you’ll pay in the end. A shorter-term loan may cost more each month but could save you thousands in interest compared to a longer-term option.

 3. Compare Monthly Payment Options

• Short-term loans come with higher monthly payments, but they allow you to pay off your debt faster and reduce interest charges.
• Long-term loans spread payments over a longer period, making them easier to manage month-to-month but you’ll pay more in interest overall.
• Use a personal loan payment calculator to see how different loan durations impact your monthly budget.

 4. Understand How Interest Rates Work

Contrary to popular belief, longer-term loans don’t always mean lower interest rates. In fact, lenders may charge higher interest rates on longer repayment terms to offset the increased risk. Even a small difference in rate can add up to significant savings or costs over the life of the loan.

5. Think About Future Financial Changes

Before locking in your loan term, consider any upcoming life changes that might affect your budget. Are you planning to start a family, switch jobs, or relocate? If your income might decrease, opting for a longer-term loan with lower monthly payments may offer more financial flexibility. Alternatively, if your income is stable and you want to minimize interest costs, a shorter term could be your best bet.

Picking the right personal loan term is more than just choosing between short or long repayment periods as it’s about aligning your loan with your financial goals and lifestyle plans over the next several years. Even if you’re looking to improve your credit, manage debt more effectively, or prepare for big life changes, your repayment term can play a major role in helping you succeed.

Here’s how to select the most suitable loan term based on your goals.

1- to 2-Year Loan Terms: For Fast Debt Payoff and Credit Boosting

Best for you if:

• You want to eliminate high-interest debt quickly, especially credit card balances.
• You’re planning a major financial move (like applying for a mortgage) and need to improve your credit score and lower your debt-to-income ratio (DTI) fast.

Example Scenario: You’re aiming to buy a home in the next two years. To strengthen your credit profile, you take out a short-term debt consolidation loan to pay off revolving credit. This reduces your credit utilization ratio, a major factor in your FICO score, and helps you qualify for a better mortgage rate down the line.

 3- to 4-Year Loan Terms: For Balanced Monthly Payments and Future Flexibility

Best for you if:

• You need a manageable monthly payment, but don’t want the high interest charges of long-term loans.
• You foresee new financial responsibilities (e.g., starting a family, moving cities) in a few years and want to keep some breathing room in your budget.

Example Scenario: You take out a personal loan to fund wedding expenses, knowing you’ll want to start a family in about four years. This mid-length term allows you to pay off the loan comfortably before your new financial chapter begins, without overwhelming your budget.

 5+ Year Loan Terms: For Lower Monthly Payments and Credit Building

Best for you if:

• Your current budget can’t support high monthly payments.
• You’re focused on building a positive payment history, the most influential part of your credit score (35% of FICO score).

Example Scenario: You’re overwhelmed by existing debt and can’t qualify for a lower rate just yet. You consolidate your debts with a long-term personal loan to reduce your monthly payments. Over the next couple of years, consistent on-time payments help improve your credit score. Once your score improves, you refinance to a shorter-term loan with better interest rates, without increasing your monthly burden.

It’s essential to follow a clear and strategic process if you’re planning to get a personal loan. From checking your credit to comparing offers, here’s how to apply for a personal loan the smart way:

1. Check Your Credit Report and Score

Review your credit profile to see where you stand before applying. Lenders evaluate your credit score, credit history, income, and existing debts to determine loan eligibility. 

2. Assess Your Budget and Determine Affordability

Take a close look at your monthly income and expenses to figure out how much you can realistically afford to pay. A personal loan calculator can help you visualize different repayment terms and interest rates, so you can choose the loan structure that fits your budget without straining your finances.

 3. Prequalify Without Impacting Your Credit

Many online and traditional lenders offer a prequalification process that allows you to check your loan eligibility with a soft credit pull- meaning it won’t affect your credit score. Prequalifying can give you an estimate of your loan amount, interest rate (APR), term length, and expected monthly payment, helping you compare options risk-free.

4. Compare Loan Offers from Multiple Lenders

Once you’re pre-qualified, take the time to compare offers from different lenders. Pay close attention to the Annual Percentage Rate (APR), as it reflects the total cost of borrowing, including fees. Lower APRs generally mean lower overall borrowing costs. Also, compare repayment terms, monthly payment amounts, and lender perks like flexible due dates or no prepayment penalties.

 5. Apply for the Loan and Receive Funds

After choosing the best loan offer, move forward with a formal loan application. Be prepared to submit documentation to verify your identity, income, and employment. This step involves a hard credit inquiry, which may cause a temporary drop in your score.

Once approved, funds are usually paid out within one to seven business days, and in some cases, you could receive your money within 24 hours. Your first repayment usually begins around 30 days after disbursement.

Looking for the best personal loan rates? We’ve compared top lenders to help you find low-interest personal loans, even with fair credit. 

Top Picks Based on Needs

• Best for Large Loans: Lightstream (Up to $100,000, no fees)
• Best for Fast Funding: Lightstream, Reach, or Upgrade (Same-day or next-day)
• Best for Low Credit: Upstart (No score requirement if applying directly)
• Best for Fair Credit: Best Egg, Upgrade, Happy Money
  
• Best with No Fees: Lightstream
• Best Prequalification Process: LendingClub, Upgrade (No SSN required)