3 Things to Consider When Choosing a Loan Term Length

Got any other big expenses coming up?

There are many ways to borrow money, and one of the most flexible options out there is a personal loan. Personal loans can come with flexible repayment terms, with different term lengths available. Unlike a credit card, personal loans come with fixed interest rates. And unlike an auto loan or a mortgage, you can take out a personal loan to pay for anything you want.

Need to remodel your kitchen? Want to start a small business? A personal loan could be a good option for you, especially if you have good credit and can qualify for the lowest interest rates. Here's what you should think about when deciding how long your loan term will be.

1. How much can you afford to pay per month?

When you get a personal loan, it's important to consider the total amount you'll be paying, between the amount you're borrowing and the interest you'll pay on top of it. But don't forget to look at your expected monthly payment, too. Run it through your existing budget and make sure you can afford it. Note that the longer you opt to pay, the lower your payments will be (but the more interest you'll pay in the end).

Different lenders offer different loan term lengths, so depending on the lender you choose, you could be looking at a term of anywhere from 12 months all the way to 144 months. Find out what term lengths are offered by lenders you're considering while you're shopping around and opt for one that gives you the flexibility you need.

2. Are you planning to take on another big expense soon?

Your personal loan will appear on your credit report, and your credit score could take a minor hit due to the hard credit check needed to approve you. This might not be a big deal if you're not intending to borrow again for a while. But if you're about to start looking for, say, mortgage loans, you want your credit score to be in the best shape possible. Plus, it could give a mortgage lender pause to learn that you've also just taken out a personal loan and have another ongoing monthly debt payment for a few years to come.

3. Is there a penalty for paying the loan off early?

Let's say you get an unexpected windfall and are able to pay off your 24-month personal loan 10 months earlier than originally scheduled. Or perhaps you are able to start paying extra toward the loan principal, cutting down your repayment period as a result. Some lenders charge prepayment penalties, meaning you'll have to pay a fee should you pay your loan off early. You may want to opt for a lender that doesn't charge for this.

Personal loans can be a good way to borrow money, but there's a lot to consider when picking one. Do your research and think carefully about how long you can commit to paying one off.