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 explained below.
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.
However, the 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.