How many years can I get a personal loan for?
Many personal loans are repaid over relatively short terms, from less than 12 months, up to five years. However, some lenders offer the option to pay back a personal loan over a longer length of time, from five years to ten years, or even longer.
Depending on your financial situation, a long personal loan term may help you enjoy more affordable repayments, though it’s important to keep the total cost of interest in mind.
How do long personal loans work?
When you take out a personal loan with a long loan term, you agree to repay what you’ve borrowed, plus interest, by making a certain number of payments over time.
The longer your loan term, the more payments you’ll need to make, each one for a smaller percentage of your loan principal. This means that if you opt for a long loan term, each repayment will be cheaper than if you opt for a short loan term.
It’s important to remember that for every personal loan repayment you make, you’ll be charged interest on the principal still owing on your loan. If you take a longer loan term, you’ll make a greater number of repayments, and therefore you’ll be charged interest a greater number of times than if you take a shorter loan term. While your monthly loan repayments may be cheaper with a longer loan term, you may end up paying much more in interest than if you’d opted for a shorter loan term.
Mathias wants to borrow $10,000 for a renovation, from a lender with an interest rate of 10%. Before he chooses a loan term, he performs a personal loan comparison to see how much the loan will cost him, both from month to month, and in total:
|Loan term||Monthly repayment||Total cost|
Mathias must decide which loan term will best suit his finances. On one hand, a shorter loan term will cost him more from month to month, putting more pressure on his household budget. But on the other hand, a long loan term will ultimately cost him much more in total – over 50% of his loan principal, in the case of the 10-year term!
Monthly, fortnightly, or weekly repayments?
Some lenders will allow you to make fortnightly or weekly personal loan repayments instead of monthly, which can sometimes be a better fit your household budget.
The other potential advantage of making more frequent personal loan payments is that you may be able to pay off your loan a little bit faster, thereby saving on interest.
Many lenders calculate monthly payments on the assumption that one month lasts for an average of four weeks. But because this isn’t an exact figure, 26 fortnightly payments over a 52-week year can end up being the equivalent of making 13 monthly repayments, rather than just 12. By paying fortnightly, rather than monthly, you can effectively make one extra payment per year – that may not sound like much, but it can add up, especially over a long-term personal loan.
Going back to Mathias and his $10,000 personal loan at 10% interest, if he took a 10-year loan term with monthly repayments, every year he’d make twelve payments of $132. By paying $1584 per year, he’d pay a total of $15,858 at the end of the term.
If Mathias cut his repayments in half but paid them every two weeks, each year he’d make 26 payments of $66, adding up to $1716 per year. This would let him finish his loan in just 8 years and 10 months, paying a total of $15,028 – a saving of $830.
Can I repay a long personal loan early?
Many lenders will allow you to make extra repayments onto your personal loan whenever you have spare funds available in your household budget. These extra repayments can help to reduce the principal you owe, reducing the interest you’re charged in the future. If you make enough extra repayments on your personal loan, you may find yourself able to exit your loan ahead of schedule.
Keep in mind that some lenders charge fees for making extra repayments or for exiting a loan early, the cost of which may outweigh the potential interest savings of paying down your loan balance. If you expect you may be able to get your loan paid off early, it’s worth checking whether a potential lender charges early exit fees before signing up for a personal loan.
When Mathias commits to his long personal loan, he starts making regular repayments, but also adds his tax refund onto the loan each year. Partway through his loan term, he receives a pay rise at his job, allowing him to put a bit more of his household budget towards his loan each payday. These extra payments help to shrink the principal amount still owing on the loan, thus reducing the interest he’s charged on this amount.
These extra payments add up over time, and lead to Mathias clearing his $10,000 debt plus interest well ahead of his scheduled term.
If Mathias had chosen a personal loan with an early exit fee, he’d have to pay his lender to leave his personal loan early, potentially undoing much of his interest savings.
But because he did his research and compared personal loans to find a lender with no exit fees, he can pay off his debt early with no extra costs to pay.
Can I refinance a long personal loan?
Much like home loans and some other types of credit, it is possible to refinance a personal loan, which involves swapping your current personal loan for a new one, often with a different bank or lender.
Borrowers may choose to refinance a personal loan if their financial circumstances change, leaving them unable to afford their current personal loan. Some borrowers also choose to refinance when they think they can get a better personal loan deal elsewhere.
When refinancing a personal loan, it’s not only important to compare the interest rates and fees to calculate their impact on your household budget, but it’s also important to keep the length of your personal loan term in mind.
If you refinance from a short personal loan to a long personal loan, your individual repayments may become more affordable, but you may end up paying more for your loan in total.
If you refinance from a long personal loan to a shorter loan term, you’ll likely pay less in total interest, though your repayments may be higher.