What is the Duration of a Personal Loan?

Personal loan durations range from 12 to 60 months and sometimes even longer.

Payments for fixed loans are made in equal monthly installments. The terms of personal loans affect the monthly repayment amount and the total interest paid over the loan’s duration.

As a borrower, you have the option to choose the repayment term of your personal loan. The longer the loan term, the higher the total cost of the loan.

What is a Long-term Personal Loan?

Long-term personal loans have repayment periods of at least 60 months. Most lenders cap loan durations between 5 to 7 years, though some extend up to 144 months. Interest rates for most long-term loans are higher than those for short-term loans.

The longer repayment term of long-term personal loans results in lower monthly payments, making the loan more affordable.

However, while long-term personal loans offer lower monthly payments, the total interest paid over the loan period is higher. Sometimes, paying off the loan early may incur additional fees and prepayment penalties.

If your goal is to lower monthly payments and increase flexibility, long-term personal loans are the most suitable.

What is a Short-term Personal Loan?

Short-term personal loans have shorter repayment periods, typically between 12 to 36 months.

Personal loans are unsecured, and the application process involves checking your income and credit. Compared to long-term personal loans, these loans may offer smaller amounts and lower interest rates.

Short-term personal loans can be used for various purposes, including paying bills, home renovations, and debt consolidation. However, these loans may have some limitations.

The shorter term of short-term personal loans allows you to pay off the loan quickly and save on interest. Additionally, you can make early repayments without any prepayment penalties.

Long-term vs. Short-term: How Much Interest Will You Pay?

The difference in interest can be significant. Financially, choosing the shortest possible repayment term is wiser as long as you can afford the monthly payments:

For example, for a $20,000 loan at a 12% interest rate:

Pros and Cons of Long-term Personal Loans

Long-term loans have advantages but also drawbacks that might be unsatisfactory. Understanding these is crucial before applying:

Pros and Cons of Short-term Personal Loans

Here are the advantages and disadvantages of short-term loans:

Which is Better?

The best term for a personal loan depends on your monthly payment affordability and the total interest over the loan term. From this perspective, if you prefer to pay less monthly but with higher interest, a longer term suits you best.

Conversely, if you’re looking for a low-cost loan and manageable monthly payments, a shorter term is the best choice.

When to Consider a Short-term Loan?

Consider a short-term personal loan instead of a long-term one in certain circumstances, including:

• If you can afford higher monthly payments. If your goal is to borrow and repay as quickly as possible, short-term personal loans are worth considering. Despite higher monthly payments, the interest on short-term loans is lower.
• If you need a quick process. Short-term personal loans are ideal if you need funds urgently. Additionally, the process is often straightforward.

When to Consider a Long-term Loan?

In long-term loans, lenders spread the cost of the loan over a longer period. You might consider a long-term loan in different scenarios, including:

• If you need lower monthly payments. Long-term loans are ideal if you prefer to pay less monthly. Lower payments can help manage the loan alongside other bills.
• If you need flexibility. When seeking more flexible repayment options, long-term loans can be considered. For example, with terms ranging from 5 to 12 years, you can choose the most suitable repayment period.
• If you need a large sum of money. Long-term loans are ideal for funding significant projects. You can borrow more than you could with short-term loans for purposes like home renovations, high medical expenses, and debt consolidation.

Can I Build Credit with Short-term Loans?

Credit is crucial for various reasons, from purchasing insurance to obtaining loans. However, achieving a high credit score takes time, and it’s best to start building your score as soon as possible.

There are many ways to build credit, so understanding how different loans work, managing finances properly, and monitoring your credit score is important.

You can build credit with short-term loans. This process includes making timely repayments during the loan period and monitoring improvements.

Since short-term personal loans add to your debt burden, delaying or failing to make payments could negatively impact your credit score.

Most short-term loans report to credit bureaus, and timely repayments can help improve your credit. Additionally, if you do not default on short-term loan repayments, it can help repair a poor credit rating.

Which Loan is Easier to Obtain if My Credit is Poor?

If you have poor credit, short-term personal loans are easier to obtain. Thus, if you do not meet the minimum credit score requirements, your chances of approval are with short-term loans.

A FICO score below 600 indicates poor credit. If you have poor credit, qualifying for a personal loan can be challenging.

Different personal loans require varying credit scores. Most lenders require at least a 650 score, while others may lend to you with a score below 600. A good credit score starts from 670 on the FICO scale, and scores above 740 are considered excellent, helping you secure the most favorable interest rates.

Other factors to consider include interest rates, loan providers, loan limits, and terms. However, if your credit score is lower, you should not expect better interest rates or favorable terms.

In this regard, providers that offer loans matching your score are most suitable for you. Therefore, if multiple options are available, it’s best to compare loan limits and interest rates to secure a loan that meets your financial needs.

Where Can I Get a Personal Loan?

You can obtain personal loans from banks, credit unions, or online lending institutions.

Online lending institutions can provide loans more quickly, and their interest rates are often lower than banks.

However, if you have an established relationship with a specific bank or credit union, it might be worth checking there first, especially if your score is below 650.

You need to assess your needs and compare different lenders to find one that matches your financial needs.