For many people, taking out a personal loan is a means of buying time. When someone is unable to afford a large expense or needs to refinance debt, one of the main advantages of a personal loan is the ability to repay on new terms.
When referring to the term of a loan, it defines the time period a borrower has to repay their new lender in full, which factors the principal amount borrowed and the annual percentage rate (APR), a percentage predetermined by the lender that accounts for interest plus additional costs and fees.
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While some people may opt for the longest possible loan term, to buy them more time on the repayment, others may opt for a shorter term. Depending on the borrower’s financial situation, both ends of the spectrum have their benefits.
Typically, a personal loan term ranges from 24 months to 84 months. So on the longer end of that spectrum, borrowers are eligible to repay the loan in full within seven years. The benefit of a longer term loan, as stated above, is the time it buys a borrower. In addition to that, borrowers have a lower monthly payment, since the loan is stretched over a longer time period. Compared to a shorter term loan, a longer term may benefit people with uncertain financial futures, living on a month-to-month budget.
However, the longer a term lasts, the more a borrower will pay in APR. That means over the life of the loan, the overall cost will be greater than that of a shorter loan term. The APR on personal loans is determined by the creditworthiness of the borrower.
On the shorter end of the term spectrum, a personal loan can be paid back within two years. While a shorter term means borrowers pay higher monthly payments, and have less time to repay the loan, they will ultimately pay less in total interest.
Let’s do a brief review. A shorter term costs less overall, but it requires a quicker repayment plan that may not work for some borrowers. A longer term ultimately costs more as interest continues to accrue, but it allows the borrower to better manage their budget with smaller monthly payments.
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