What is the best personal loan term?
Short terms help you save money; long terms give you more room in your monthly budget
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When you take out a personal loan, you’re often provided with repayment options, or term lengths. As small of a decision as it seems, the length of your loan determines your monthly payment and how much interest you’ll pay over the life of the loan. While you can get loan terms typically up to five years, the average personal loan length among borrowers (as of the fourth quarter of 2022) is just over 33 months, according to TransUnion.
When considering a loan term, you must think about how the length of the loan affects what you’ll pay.
“While it's difficult to pinpoint the absolute 'best' loan term … generally, a shorter-term loan is beneficial for those who want to minimize the total interest they pay over the loan life span and can manage higher monthly payments,” explained Michelle Delker, the founder of The William Stanley CFO Group.
“Conversely, a longer term is more suitable for those who need lower monthly payments, despite the potential of paying more interest over time.”
- Personal loan terms often run from a few years up to five years, with a few lenders offering even longer terms.
- Shorter loans have larger monthly payments, while long-term loans tend to have smaller monthly payments.
- Short-term loans save you interest over the life of the loan, while long-term loans often come with higher interest rates.
What personal loan term lengths are available?
Personal loan lengths differ significantly from other loan options. Personal loans tend to max out at five-year term lengths. Additionally, many personal loan lenders have minimum lengths — typically two-year repayment terms. So, while personal loans are flexible in many ways, when it comes to repayment times, they’re one of the more inflexible lending options.
Of course, the exact term lengths you’ll qualify for depend largely on the lender you’re working with. Lenders like LendingClub and OneMain Financial offer terms between 24 and 60 months, while other lenders like Upgrade offer loans up to 84 months.
» MORE: What are loan terms?
Factors that determine a personal loan term length
With many personal loan lenders, you’re given a variety of options with multiple loan lengths. When you’re trying to decide on the right loan term for your budget, there are a few factors to consider.
- Monthly payment
- Your monthly budget plays a crucial role when you’re figuring out what loan length makes sense. If you need a small monthly payment, you may have no choice but to take on a longer loan. The other option is to keep the loan amount small so you can fit the payments into a shorter time frame.
If your priorities are to pay off debt as quickly as possible, stick with a shorter repayment period, but expect to have expensive monthly payments. Keeping the loan short also saves you the most in interest payments.
- Loan amount
- One of the biggest factors in determining your loan’s length is the size of the loan. Many personal loan lenders offer high loan amounts of up to $100,000. If you’re paying off that large of a loan and you’re not wealthy, your budget will require you to spread that out over a longer term. Smaller loans of just a few thousand dollars are much more manageable.
- Long-term impact of the interest rate
- If you get rate quotes from personal loan lenders, they often list out how different term lengths affect your overall interest paid. If you have excellent credit and qualify for a lower interest rate, taking on a long-term loan won’t cost you as much as someone who qualifies for an interest rate of 20% or higher.
Borrowers who qualify only for high interest rates should seriously consider if they’re willing to pay potentially thousands in interest over the entire life of the loan. Taking the time to improve your credit score can save you a substantial amount when you need to borrow money.
- Willingness to carry debt
- How much debt you’re willing to take on is a personal choice. Some borrowers are comfortable with longer-term debt if it means they keep their payments low, while others prioritize becoming debt-free sooner and opt for shorter terms.
- Current financial stability
- Where you are in your financial life also influences your loan term choice. Younger borrowers may favor longer terms for lower monthly payments, while those nearing retirement or with long-term debt commitments like mortgages may choose shorter terms for financial security.
- Credit score
- Your credit profile influences your loan term choice because it affects your interest rate. A strong credit profile may lead to better terms, making shorter terms more affordable. Those with less favorable credit may require longer terms to manage much higher interest rates.
Which personal loan term length should you choose?
When you’re deciding how long you should commit to the debt, consider how each term will affect your budget and the full amount you’ll pay in fees and interest.
When a short-term loan is best
A short-term loan is ideal, but it’s only possible for certain borrowers. This option may be right for you if:
- You want low interest rates. Smaller loans are less risky for lenders, so good-credit borrowers are often rewarded with lower interest rates.
- You have the means to take on high monthly payments. If you’re taking out a larger loan, a shorter term helps you reduce interest payments, but you’ll have higher monthly payments.
- You want to avoid being in debt. Keeping your borrowing time down helps you avoid having long debt obligations that can become difficult to manage.
- You’re taking out only a small loan. Small loans are less costly all around and are easier to pay down quickly.
When a long-term loan is best
Longer-term loans offer more flexibility, but they come with a higher price tag. Consider a long-term loan only if:
- You want to prioritize low monthly payments. Longer-term loans help make your monthly payment more comfortable because you’re spreading the cost of the loan out over an extended period.
- You’re taking on a large loan. Large loans are often affordable only if borrowers can spread out payments.
- You have a lower income. If you’re of modest means, extending your loan payments allows you to manage your monthly payments more easily.
- You’re balancing multiple debts. If you have other debt obligations, you may have room in your budget for only a small monthly payment. Stretching out your loan length can help you accomplish this.
To demonstrate the effect loan terms have on your monthly payments and how much you pay in interest, let’s look at a $10,000 loan with three different terms. You should expect to pay these amounts with this particular lender:
|Term length||Interest rate||Monthly payment||Total interest paid|
If you stick with a two-year loan, you pay just over $500 in interest, but the same loan amount costs you close to $5,000 in interest if you extend the loan to seven years.
» MORE: How to manage your money
What’s the longest personal loan term?
Most personal loan lenders have a maximum term length of five years, but some offer terms of up to seven years. Personal loan lenders keep terms relatively low to balance out the risk they face in lending to you.
What’s an average personal loan term?
According to a TransUnion report, the average term length for personal loans in the fourth quarter of 2022 was about 33 months, or just under three years.
Can I pay off a personal loan early?
Typically, yes, you can pay off a personal loan as soon as you have the money to do so. Certain personal loan lenders charge prepayment penalties to make up for the interest payments lost when you pay down the balance quickly. But this practice is becoming less common among lenders, thankfully.
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- TransUnion, “TransUnion Unsecured Personal Lending Industry Insights Report.” Accessed Aug. 22, 2023.
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