How to Choose the Best Personal Loan Term Length

Personal loans are repaid in monthly installments over a set period called the loan term. Choosing the right personal loan term length is important because it helps determine how much you’ll pay each month and the interest costs overall.

Here’s what you need to know about personal loan terms and how to choose the best one for you.

What is a common personal loan term length?

Personal loan terms usually range from two to seven years, though they can vary by lender. Some lenders have one-year terms, while others offer terms of 10 years or more for specific types of loans, like home improvement loans.

Lenders often offer terms in yearly increments, though they might be expressed in months. For example, a lender might offer three-year, four-year and five-year terms but state them as 36-month, 48-month and 60-month terms.

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How term length affects personal loans

The amount of time you have to pay off a personal loan affects your monthly payments and the total interest paid over the life of the loan.

A shorter-term loan has a higher monthly payment but costs less total interest, while a longer-term loan has lower monthly payments and higher interest costs.

For example, consider a $10,000 loan with a 15% annual percentage rate (APR).

• With a three-year term: Your monthly payment would be about $347, and you’d pay $2,480 in total interest.

• With a five-year term: Your monthly payments would be about $238, and you’d pay $4,274 in total interest.

Use this personal loan calculator to see how different term lengths affect a loan’s monthly payment and interest costs.

How to choose between shorter and longer loan terms

Try to balance short- and long-term affordability when choosing a loan term. The ideal loan term is the shortest one you can get while still being able to comfortably afford the monthly payments.

A shorter loan term makes sense when:

• You want to pay off the loan fast.

• You want to save money in interest.

• You can afford a higher monthly payment.

• You’re borrowing a small amount of money.

A longer loan term makes sense when:

• You want to keep monthly payments low.

• You’re borrowing a large amount of money and need a longer time to pay it off.

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What to consider when choosing a personal loan term

Loan amount: It may be easier to repay a small loan in a short period, but a longer term may be needed to repay a large amount of money. Some lenders, such as LightStream, offer terms longer than 10 years for home improvement loans.

APR: A lender may offer lower APRs on shorter-term loans, because there’s less time for a borrower’s financial situation to change during a short repayment term, which lowers the risk of default. When comparing personal loan offers, take note of the APR at different term lengths.

Monthly payments: Make sure you can comfortably afford the monthly payment for the full loan term. Many lenders charge late fees for missed payments, and your credit score can drop significantly if you miss a payment by 30 days or more.

Total interest costs: If your loan offer doesn’t outline the total interest costs, use a personal loan calculator to see how much you’ll pay in total interest for the loan. Gauge whether you feel comfortable with the overall cost of the loan at that term length.

Potential changes to your future budget: Personal loans are typically fixed-rate loans, which means monthly payments stay the same throughout the life of the loan. If you anticipate having less cash flow in the coming months or years, a loan term with lower monthly payments may be the right choice.

How to get a personal loan

Follow these steps to get a personal loan.

1. Check your credit. Lenders typically use credit score, credit history, income and existing debts to determine if an applicant qualifies for a personal loan. Get a copy of your credit report before applying for a loan to understand what’s influencing your score. You can get your report for free at annualcreditreport.com or on NerdWallet. Dispute credit report errors that could be dragging your score down, such as an incorrect balance on a credit account.

2. Review your budget. Examine your cash flow to see what size monthly payment you can afford. Use a personal loan calculator to determine the loan term and APR that would give you affordable monthly payments. 

3. Pre-qualify. Many lenders let you pre-qualify for a personal loan with no impact to your credit score. Pre-qualifying shows your likelihood of loan approval, plus it gives you an estimate of your loan amount, APR, loan term and monthly payments.

4. Compare offers. Once you’ve pre-qualified with multiple lenders, compare offers to see which best fits your needs. Use APR for an apples-to-apples comparison of the cost of the loan.

5. Apply. When you’re ready to accept a loan offer, you’ll submit a formal application. You’ll likely need to show documents to verify your identity and income. Expect the lender to run a hard credit check, which can cause your credit score to dip slightly. If approved, most lenders will send funds within a week. Some lenders can fund a loan the same or the next day after you’re approved. Your first payment is typically due about 30 days later.

» MORE: Pros and cons of personal loans