How Long Should Your Personal Loan Repayment Term Be?

When you take out a personal loan, you need to decide how long your loan term will be. Most lenders offer a choice, and your repayment timeline could typically be anywhere from one to seven years, although this varies by lender.

So, how long should you take to repay your personal loan? Here's what you need to consider to decide.

Your term length affects monthly payments and total borrowing costs

When you take out a personal loan and decide on your term length, you need to realize that there's a tradeoff. You can have lower monthly payments coming out of your bank account each month if you opt for a loan with a long payoff timeline. However, that long payoff time means you pay interest for a longer time so you spend more in total to borrow.

On the other hand, you could choose a shorter payoff timeline. By doing so, you'd be committing to higher monthly payments and less flexibility in your monthly budget. But you would pay interest for a shorter period so you spend less in total to borrow.

Just how big is the difference in monthly payments and total payoff costs? The table below shows what you'd pay at different loan term lengths if you borrowed $5,000 at a 10% interest rate.

As you can see, there's a dramatic difference in monthly payments and total interest costs over time. If you could repay your loan after just a year, you'd end up paying $1,697.55 less in interest compared with if you took seven years to become debt-free. But your monthly payments would be $356.57 higher!

So what loan term is right for you?

Unfortunately, there isn't one right answer to the question of how long your personal loan term should be. Different people have different priorities.

If accepting a large monthly payment would mean you couldn't pay for essentials like rent or retirement savings, obviously you would be better off with a longer loan term even if that meant you paid more interest. On the other hand, sending thousands of dollars extra to your creditor over time is money you won't have for other financial goals.

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For most people, the best loan term is the shortest one that comes with payments they can comfortably afford. However, if you prioritize flexibility in your budget instead, you might want to opt for a longer payoff time -- and then make voluntary extra payments when you can.

Just be sure you look at both total payoff costs as well as monthly payments and decide how best to balance the competing goals of keeping total financing charges down while avoiding a monthly payment you can't really cover.