The Pros and Cons of Longer Repayment Terms on Personal Loans

Learn whether a long or short loan repayment term is a better option for you. Image source: Getty Images.

When you take out a personal loan, chances are good you’ll have a choice of repayment timelines. Depending on your lender, you may have the option to pay your loan off over as short as a few months or a single year or you may have the choice to stretch payments out for a decade.

If you have your pick of a long repayment timeline or a short one, which is the better option? It depends on your situation, as there are pros and cons to both repayment term types.

Pros of a longer repayment timeline vs. a shorter repayment timeline

Some of the biggest benefits of choosing a longer repayment period include the following:

Your monthly payments will be 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 would be $323 per month. But if you opted for a longer repayment term and paid off your loan over eight years instead, your monthly payments would be just $152 per month. This frees up $171 monthly.

You have more flexibility. Just because you choose a longer repayment timeline doesn’t necessarily have to mean you must take the full time to pay off your loan. You could opt to make extra payments if you have some spare cash to do so. Making extra payments when you can would 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 decide to pay it off early.

You free up cash for other things. Because your monthly payments are lower on a loan with a longer repayment term, this gives you more wiggle room in your budget. You may need this extra cash to put towards other important goals. For example, if you have other high interest consumer debt to repay, such as credit cards, it could make sense to choose a longer-term personal loan with lower monthly payments so you can put more of your cash towards the costlier 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 to get all your free money.

These are all major benefits that should be carefully considered when deciding how long you’ll take to repay your personal loan. If you don’t have a ton of spare cash and you have other pressing financial needs, the benefits will likely outweigh the downsides of a long repayment timeline.

Cons of a longer repayment timeline vs. a shorter repayment timeline

While there are significant advantages to a long repayment term, there are some big downsides too. Here are some of the disadvantages:

The longer your loan term, the more interest you’ll pay. 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 and because there’s more of a chance something will go wrong and you won’t pay when you’ve stretched out the process. Because it’s a riskier loan to make, lenders charge a higher 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. 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. And while you may plan to pay back a longer-term loan early by making extra payments, you may not be motivated enough to do that. Most people will work really hard not to miss a required payment, but not quite so hard to make voluntary extra payments.

You may have fewer choices for who you borrow from. If you want a really long repayment timeline, such as a loan you pay off over a decade, you will have fewer options for who to borrow from than if you want a loan that’s repaid over just a few years. 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.

As you can see, there are many situations where the disadvantages outweigh the benefits of a longer repayment term. If becoming debt free ASAP is important to you and you have the wiggle room in your budget, a short 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 and what your money goals are. The important thing is to consider the decision carefully because you can’t just change your repayment term. Once you have your loan, you have to stick to the terms unless you refinance to a new loan with a different repayment timeline.