The Pros and Cons of Longer Repayment Terms on Personal Loans

When you take out a personal loan, you may have the option to pay your loan off over several possible timelines. You might be able to pay it off in as short as a few months or you may have the choice to stretch payments out for a decade. There are advantages and disadvantages associated with longer repayment terms on personal loans.

Longer repayment terms on personal loans will lower your monthly payment and a long-term loan might make you feel as though you're under less pressure to get the loan paid back quickly. However, longer repayment terms on personal loans also make those loans more expensive.

Loan term calculator

The calculator below can help you see how different loan terms affect your monthly payment. Just enter the amount you plan to borrow, the term you want, and the interest rate. If you're not sure what interest rate to use, 14-18% is a good starting point for borrowers with average credit -- check out our guide to interest rates for personal loans for more information.

Pros of longer repayment terms on personal loans

Some of the biggest benefits of choosing longer repayment terms on personal loans include the following:

• Your monthly payments are lower. The longer you take to repay your loan, the lower the monthly payments will be. Say you take out a $10,000 personal loan at 10% interest. If your repayment timeline is three years, your monthly payments are $323 per month. Now, let's imagine you're a fan of longer repayment terms on personal loans. Instead of three years, you pay off your loan over eight years. In this scenario, your monthly payments are just $152 per month. This frees up $171 monthly. This is the perfect example of how longer repayment terms on personal loans can keep your monthly payment low.
• You have more flexibility. Just because you're drawn to longer repayment terms on personal loans doesn't necessarily have to mean you must take the full amount of time to pay off your loan. You could opt to make extra payments if you have some spare cash to do so. This strategy will give you many of the same benefits that come with a shorter-term loan -- but you wouldn't be locked into a higher payment in months when you don't have extra funds. Just be sure that your loan doesn't have a prepayment penalty if you think you may pay it off early.
• You free up cash for other things. Because your monthly payments are lower with longer repayment terms on personal loans, this gives you more wiggle room in your budget. You may need this extra cash to put towards other important obligations, like credit card debt, a payday loan, or other unsecured debt. Or, if you have access to a 401(k) with an employer match at work, you may need to put more of your money towards investing in this account.

These are all major benefits that should be carefully considered when deciding whether to choose longer repayment terms on a personal loan. If you don't have a ton of spare cash and you have other pressing financial needs, the benefits -- including a lower monthly payment -- will likely outweigh the downside.

Cons of longer repayment terms on personal loans

While there are significant advantages to longer repayment terms on personal loans, there are some big downsides too. Here are some of the disadvantages:

• A longer loan term means accumulating more interest charges over time. When you pay interest for eight years instead of for three years, obviously you're going to end up owing a lot more in interest due to the extra five years you're stuck paying it. Remember that $10,000 loan at 10% interest from our example above? If you pay it off over eight years, you'd pay a total of $4,567 in interest -- but if you paid it off over three years, your total interest cost would be just $1,616. Your longer repayment term makes your loan almost $3,000 more expensive -- assuming your interest rate is the same.
• You'll likely have to pay a higher interest rate. With many personal loan lenders, the length of your loan is one factor determining the interest rate you're charged to borrow money. A longer term is riskier for the lender because there's more of a chance interest rates will change dramatically during that time. There's also more of a chance something will go wrong and you won't pay the loan back. Because it's a riskier loan to make, lenders charge a higher interest rate. If you get stuck with a higher interest rate on top of paying interest for longer, your loan could be much more expensive.
• It will take longer to become debt-free. This is one of the biggest disadvantages of longer repayment terms on personal loans. Becoming debt-free is a major financial goal for many people, and it's an important first step to financial freedom. When you don't have to worry about paying creditors anymore, you have more flexibility in what you can do with your money. Your credit score improves. You can do things like use a credit card to cover everyday items and pay the credit card off before the due date. Not only does that make the credit card interest-free for you to use, but it may also give you some pretty great perks, like airline miles. Sure, anyone can use their credit card to pay everyday expenses, but being debt-free means never having to worry about whether you can pay it off at the end of the month.
• You may have fewer choices for who you borrow from. Not every lender offers longer repayment terms on personal loans. When you don't have a wide selection of lenders, you could end up with a loan that has a higher interest rate or other unfavorable terms such as prepayment penalties. You may even end up with a lender who tells you what the repayment term will be rather than offering you options.

As you can see, there are many situations where the disadvantages outweigh the benefits of longer repayment terms on personal loans. If becoming debt-free ASAP is important to you and you have the wiggle room in your budget to increase the monthly payment, a shorter repayment timeline is usually the way to go.

What's the best choice for you?

The right choice on your loan repayment timeline will vary depending on your financial situation, including how much flexibility you have in your budget, how much of a monthly payment you can afford, and what your money goals are. Before you decide whether you want a short-term loan or a long-term loan, carefully consider which will work best in your particular situation. Once you have your loan, you have to stick to the terms unless you refinance to a new loan with a different repayment timeline.