The pros and cons of longer repayment terms for personal loans

Benefits of longer repayment terms on personal loans

Some of the biggest advantages of choosing longer repayment terms on personal loans are:

  • Your monthly payments are lower. The longer you take to repay your loan, the lower the monthly payments will be. Suppose you take out a personal loan of $ 10,000 at 10% interest. If your repayment schedule is three years, your monthly payments are $ 323 per month. Now imagine that you are a fan of longer personal loan repayment terms. Instead of three years, you pay off your loan over eight years. In this scenario, your monthly payments are only $ 152 per month. This frees up $ 171 per month. It’s 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 attracted to longer repayment terms on personal loans, doesn’t mean you necessarily have to take all the time you need to pay off your loan. You can choose to make additional payments if you have some cash to do so. This strategy will give you many of the same benefits as with a shorter term loan, but you wouldn’t be stuck on a higher payment during the months when you don’t have additional funds. Just make sure you don’t have a prepayment penalty on your loan if you think you can pay it off sooner.
  • You free up money for other things. Because your monthly payments are lower with longer repayment terms on personal loans, it gives you more leeway in your budget. You may need this extra money to pay off other important obligations, like credit card debt, a payday loan, or other unsecured debt. Or, if you have access to a 401 (k) with a matching employer at work, you may need to spend more money investing in that account.

These are all major advantages that should be carefully considered when deciding whether to opt for longer repayment terms on a personal loan. If you don’t have a ton of cash on hand and have other pressing financial needs, the pros – including a lower monthly payment – will likely outweigh the cons.

Disadvantages of Longer Repayment Terms for Personal Loans

While there are significant advantages to lengthening personal loan repayment terms, there are also major disadvantages. Here are some of the downsides:

  • A longer loan means accumulating more interest costs over time. When you pay interest for eight years instead of three years, obviously you’ll end up owing a lot more interest because of the extra five years you have to pay it. Remember the $ 10,000 loan at 10% interest from our example above? If you paid it back over eight years, you would pay a total of $ 4,567 in interest, but if you paid it back over three years, your total interest expense would only be $ 1,616. Your longer repayment term makes your loan almost $ 3,000 more expensive, assuming your interest rate is the same.
  • You will likely have to pay a higher interest rate. With many personal lenders, the length of your loan is one of the factors that determine the interest rate you are charged for borrowing money. A longer term is riskier for the lender, as the interest rates are more likely to change drastically during this period. There is also a greater chance that something will go wrong and you will not pay back the loan. Because this is a riskier loan, lenders charge a higher interest rate. If you end up with a higher interest rate on top of paying interest longer, your loan could be much more expensive.
  • It will take longer to get free of debt. This is one of the biggest drawbacks to longer repayment terms for personal loans. Getting rid of debt is a major financial goal for many people, and it’s an important first step towards financial freedom. When you no longer have to worry about paying your creditors, 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 off the credit card before the due date. Not only does this make the credit card interest free for you, it can also provide you with some great benefits like airline miles. Of course, anyone can use their credit card to pay for their daily 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 less choice for who you borrow. Not all lenders offer longer repayment terms on personal loans. When you don’t have a wide choice of lenders, you could end up with a loan with a higher interest rate or other unfavorable terms such as prepayment penalties. You may even end up with a lender who will tell 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 advantages of a longer repayment term for personal loans. If it’s important to you to get out of debt and have some wiggle room in your budget to increase the monthly payment, a shorter repayment term is usually the way to go.

Which is the best choice for you?

The right choice of when to repay your loan will vary depending on your financial situation, including how much flexibility you have in your budget, how much monthly payment you can afford, and your financial goals. Before deciding whether you want a short term loan or a long term loan, think carefully about which one will work best in your particular situation. Once you get your loan, you must meet the terms, unless you are refinancing a new loan with a different repayment schedule.

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