What Is a Loan Term?
A loan term is the amount of time you have to repay the loan. It's typically expressed in months or years. For example, a 3-year personal loan has a term of 36 months, while a 30-year mortgage has a term of 360 months.
Payment Size vs. Term Length
The length of your loan term has a direct impact on your monthly payment. Longer terms spread the loan balance over more months, which reduces the amount you pay each month. Shorter terms condense the balance into fewer installments, which increases your monthly payment.
Consider a $15,000 personal loan at 10% APR.
Sources: Experian
Total Interest vs. Term Length
While a longer term lowers your monthly payment, it increases the total interest you pay over the life of the loan. That's because interest accrues over a longer period, even if the interest rate is the same.
In the same $15,000 loan example, the 3-year term results in total interest of about $2,424, while the 5-year term results in total interest of about $4,122.
Sources: Experian
Short and Long Terms
Different loan terms come with distinct advantages and disadvantages. Use the table below to compare the key characteristics.
Short-term loans typically have repayment periods of 12 to 18 months, while long-term loans can range from three to twenty-five years.
| Aspect | Short-Term Loan | Long-Term Loan |
|---|---|---|
| Monthly payment | Higher | Lower |
| Interest rate | Typically lower | Varies; may be higher or lower |
| Total interest paid | Lower overall | Higher overall |
| Time in debt | Shorter | Longer |
| Qualification difficulty | Easier to qualify for | More complex, may require collateral |
Sources: Consumer Financial Protection Bureau, Experian, Credible
Typical Terms by Loan Type
Loan terms vary widely by loan type. Short-term loans, such as some personal loans, often have terms of 12 to 18 months. Long-term loans, such as auto loans, student loans, and mortgages, can span several years, with some mortgages lasting up to 25 years or more.
- Personal loans: typically 12 to 60 months
- Auto loans: typically 36 to 72 months
- Student loans: typically 10 to 20 years
- Mortgages: typically 15 to 30 years
Sources: Credible
How to Calculate Payments for Different Terms
To estimate your monthly payment and total interest for different loan terms, you can use the standard amortization formula:
M = P [ r(1+r)^n ] / [ (1+r)^n - 1 ]
Where M is the monthly payment, P is the loan principal, r is the monthly interest rate (annual rate divided by 12), and n is the number of monthly payments (term in months).
For example, a $15,000 loan at 10% APR over 3 years (36 months) would have a monthly rate of 0.10/12 = 0.008333, and n = 36.
Sources: Experian
Choosing the Right Term for Your Situation
The right loan term depends on your budget and financial goals. A shorter term means higher monthly payments but less interest paid overall. A longer term reduces your monthly payment but increases total interest. Consider your monthly cash flow and how long you want to be in debt.
Interest rates may vary with term length, so compare offers from multiple lenders to see which term offers the best balance of payment and total cost for your situation.
Sources: Consumer Financial Protection Bureau, Experian
Frequently asked questions
Is a longer loan term always more expensive?
In terms of total interest paid, a longer term is generally more expensive because interest accrues over a longer period, even if the monthly payment is lower.
Sources: ExperianWhat is the average term for a personal loan?
The average term for a personal loan is not a fixed figure; it varies by lender and borrower. However, personal loan terms commonly range from 12 to 60 months.
Sources: CredibleCan I change my loan term after origination?
Changing your loan term after origination usually involves refinancing, which means taking out a new loan to pay off the existing one. This can be done with the same lender or a different one, and it may affect your interest rate and fees.
How does the term affect my credit score?
The term itself doesn't directly affect your credit score, but the length of your credit history and your payment history do. A longer loan term means you'll have the loan on your credit report for a longer period, which can influence the average age of your accounts. Making on-time payments throughout the term can help your credit score.
Sources
- Understand the different kinds of loans available — Consumer Financial Protection Bureau
- How Do Loan Terms Affect the Cost of Credit? - Experian — Experian
- How Loan Terms Impact the Cost of Credit — Credible