Short-term vs. long-term loans: Which is cheaper? | finder.com
usfpl-loansterms-featured-image

Short-term vs. long-term loans

We value our editorial independence, basing our comparison results, content and reviews on objective analysis without bias. But we may receive compensation when you click links on our site. Learn more about how we make money from our partners.

How much time should you take to pay off that loan?

Looking at a personal loan’s APR can help you compare offers, but it doesn’t give you the whole picture of how much it’ll cost. How long you take to pay back your loan can have just as big of an impact on the price. A shorter term might be a higher immediate expense, but it could save you in the long run.

How do different terms affect the cost of a loan?

How long you take to pay back a personal loan directly impacts your monthly repayments and how much you end up paying in interest overall.

  • Short loan terms. These come with higher monthly repayments because your loan is divided into fewer repayments. But since there’s less time for interest to add up, you end up paying less in the long run.
  • Long loan terms. These keep your monthly cost down because your loan balance is divided into more repayments. But you’ll pay significantly more in interest over the life of your loan.

Let’s take a look at an example. Say you have a $10,000 loan with a 6% APR. You have a choice between loan terms of one, three or five years. This is how it breaks down:

Loan termMonthly repaymentTotal interestTotal repayment
1 year$860.66$327.97$10,327.97
3 years$304.22$951.90$10,951.90
5 years$193.33$1,599.68$11,599.68

In this example, the loan with the shortest term costs nearly five times less than the loan with the longest term overall. But the monthly payments on the one-year loan are over four times higher than those of the five-year loan.

How long can you take to pay back a personal loan?

The most common terms on a personal loan are three or five years. However, you can find loans with terms as short as one year and as long as seven years.

How do different terms affect the interest rate?

Some lenders such as Marcus by Goldman Sachs, Best Egg and SoFi offer higher rates for longer loan terms. You also might have to pay a higher percentage of your loan amount as an origination fee. In these cases, getting a longer loan term might not save you as much month to month while still significantly increasing the total cost of your loan.

Not all lenders advertise this, though you might notice a difference in the rates if you prequalify for multiple loan terms.

Let’s take a look at another example. Say you were applying for a $10,000 loan and considering different loan terms. Here’s how it might break down:

Loan termAPRMonthly repaymentTotal interestTotal repayment
1 year6.74%$864.07$368.83$10,368.83
2 years7.74%$451.09$826.11$10,826.11
4 years9.74%$252.38$2,114.19$12,114.19
5 years10.74%$216.13$2,967.79$12,967.79

In this example, the shortest loan term costs over eight times less than the loan with the longest term. But your monthly repayments for the one-year loan are nearly four times higher than with the five-year loan. In this case, a longer term doesn’t give you as much monthly savings and hugely increases the cost of your loan.

Payday and installment loan terms

Short-term loans for borrowers with bad credit — like payday or installment loans — don’t necessarily follow this rule. Payday loans can have terms as short as 14 days and come with APRs significantly higher than installment loans, which come with terms as long as three years.

Calculate how much your loan term affects the cost

Use our personal loan calculator to see how changing the loan term changes the short- and long-term costs of your personal loan.

Compare personal loans

Updated April 18th, 2019
Name Product Filter Values Minimum Credit Score Max. Loan Amount APR
Good to excellent credit
$100,000
5.34% to 35.99%
Get personalized rates in minutes and then choose a loan offer from several top online lenders.
550
$100,000
3.99% to 35.99%
Quickly compare multiple online lenders with competitive rates depending on your credit.
620
$50,000
7.99% to 35.89%
Affordable loans with two simple repayment terms and no prepayment penalties.
640
$40,000
6.95% to 35.89%
A peer-to-peer lender offering fair rates based on your credit score.
680
$100,000
5.99% to 16.24%
No fees. Multiple member perks such as community events and career coaching.
550
$10,000
34% to 155% (Varies by state)
Check eligibility in minutes and get a personalized quote without affecting your credit score.
640 FICO®
$35,000
5.99% to 29.99%
A prime lender with multiple repayment methods.
550
$100,000
3.84% to 35.99%
Get connected to competitive loan offers instantly from top online consumer lenders.

Compare up to 4 providers

Advantages and disadvantages of short loan terms

Advantages

  • Lower overall cost.
  • Potentially lower rates.
  • Get out of debt faster.

Disadvantages

  • Higher monthly repayments.
  • Can require higher income and lower DTI to qualify.
  • Stronger impact on your budget.

Advantages and disadvantages of long loan terms

Advantages

  • Lower monthly repayments.
  • Might not noticeably affect your budget.
  • Potentially easier to qualify.

Disadvantages

  • Potentially higher APR.
  • Higher total loan cost.
  • In debt longer.

Which is the right option for me?

While a shorter loan term has more advantages than a longer term, the high monthly repayments might make you want to think twice. In fact, you might not qualify for the shortest loan term if you have a high debt-to-income (DTI) ratio. If your monthly expenses are more than 20% of your income, longer terms might be the only option available to you.

You can get the best of both worlds by applying for the shortest term that you can comfortably budget each month. Before you compare lenders, calculate how much money you have left after your monthly bills and expenses. Leave some funds for emergency costs, and look for a loan term and APR that can give you a monthly repayment that fits that amount.

Can I pay off my loan early?

It depends on your lender. Many don’t charge prepayment penalties, meaning you could save on interest by making extra repayments.

For example, say you have some money coming in soon, but can’t afford high monthly repayments right now. Looking for a lender that doesn’t charge fees for prepayments and charges the same rates for the same loan terms could help you save on interest in the long run. However, you might have to call or prequalify to get this information.

Should I pay off my loan ahead of time?

Bottom line

Getting the shortest loan term helps you save on the total cost of your loan and in some cases might help you qualify for lower rates and fees. But a longer loan term can make your repayments low enough that they don’t affect your budget.

Learn more about how it all works by reading our comprehensive guide to personal loans.

Frequently asked questions

Was this content helpful to you? No  Yes

US Personal Loans Offers

Important Information*
Credible Personal Loans

Get personalized rates in minutes and then choose a loan offer from several top online lenders.

Even Financial Personal Loans

Get connected to competitive loan offers instantly from top online consumer lenders.

LendingClub Personal Loan

A peer-to-peer lender offering fair rates based on your credit score.

SoFi Personal Loan Fixed Rate (with Autopay)

No fees. Multiple member perks such as community events and career coaching.

Ask an Expert

You are about to post a question on finder.com:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder.com provides guides and information on a range of products and services. Because our content is not financial advice, we suggest talking with a professional before you make any decision.

By submitting your comment or question, you agree to our Privacy and Cookies Policy and Terms of Use.

Questions and responses on finder.com are not provided, paid for or otherwise endorsed by any bank or brand. These banks and brands are not responsible for ensuring that comments are answered or accurate.

US Personal Loans Offers

Important Information*
Credible Personal Loans

Get personalized rates in minutes and then choose a loan offer from several top online lenders.

Even Financial Personal Loans

Get connected to competitive loan offers instantly from top online consumer lenders.

LendingClub Personal Loan

A peer-to-peer lender offering fair rates based on your credit score.

SoFi Personal Loan Fixed Rate (with Autopay)

No fees. Multiple member perks such as community events and career coaching.

Go to site