About Loan Terms
Loan terms can vary
considerably. For example, a Payday
loan has a loan term of only 1 month, as you are expected to pay
back the loan once the month is over. A mortgage can be as much as 30 years.
With secured loans , you usually
have the option with most lending companies to choose how long you want the
loan to be taken out. The loan term greatly affects the monthly cost of the
loan as well as how much you will have paid in total. Those on a stricter
budget may want a long term loan and those with enough expected monthly
income may want a loan with a shorter loan term. Benefits and Costs are
Long Loan Term
People with smaller
budgets or who are planning on saving for a larger expense may want to
consider a longer loan term. The longer the loan term, the smaller the
monthly payments. For example, a £10,000 at 10% interest over 5 years
is £212 per month. That same loan amount at the same interest rate
paid back over a period of 10 years is £132. That's 80 fewer
pounds per year simply by extending the length of the loan, and for anyone
on a tight budget, that is quite a lot of money to save.
longer you have a loan out, the longer it is prone to interest. On the
initial 5 year loan in the previous example, you would have only paid
£2,720 in interest over the course of the loan. But with the 10 year
loan, you would have paid £3,200 in interest over the course of the
loan. So there is a tradeoff between how little you want to pay each month
and how much you pay over time.
Short Term Loan
Obviously if a long term loan lowers the payments, a short
term loan raises them. However, due to the tradeoff in interest and
length, you pay less over the course of the loan. If you can afford to make
the monthly payments, you always want to do a shorter term loan so that you
don't pay off more over the course of your life, but many people take
long term loans because they are far less of an inconvenience while you are
paying the loans back.
As you can see, the loan term makes quite a bit of
difference and affects how easily you can pay back the loans, how likely you
are to default, and how much you are spending in interest over time. Take
the time to fully consider the loan term before you make the final decision
on your loan.