Should You Take a Personal Loan with Longer Repayment Terms?

Like Buicks, bowling balls, and Barbie Dolls, time is a commodity, and it’s the smart financial consumer who knows how to leverage a ticking click.

That goes double for personal loam consumers, who in many cases can shape their personal loan timetables to best meet their unique financial needs.

“Time is absolutely a factor with personal loans,” said Parvesh Benning, a financial advisor with Protect Your Wealth, in Dundas, Ontario, Ca. “Your loan repayment tables indicate how long it will take to pay off the debt (also known as loan amortization.) The longer the amortization period, the more interest a borrower will pay on the loan.”

Is it better to focus on loan interest rates or repayment schedules when applying for a personal loan? That depends on your personal financial needs after you take out a personal loan.

“A borrower should ask “what’s more important, cash flow or the cost of borrowing?” Benning said. “A borrower may opt for a slightly higher interest rate, but a longer repayment schedule to help cash flow (as it lowers the payment). At the same time, a borrower that can afford the higher payment should always look to reduce interest rate first and foremost.”

5 Things to Know About a Longer Loan Repayment Plan

If you’re set to take out a personal loan, make sure to figure out what loan repayment table saves you the most time, money, and trouble.

To get the upper hand on loan time management, know the score with these five longer loan repayment realities.

Don’t go “too far” out. Stretching debt over time means that you’ll be paying more interest than you would with a loan that gets repaid sooner. The further the “stretch”, there’s a tendency to have higher interest rates.

“More importantly, if you go too far out, the lenders may ask for a re-evaluation of the interest rates periodically, or even continually,” said Steve Replin, founder of the Replin Law Group LLC, in Denver, Co. “Therefore, there’s a sweet spot for every lender regarding the timetable for the repayment of any loan.”

Rate comparison shopping is a good idea. When looking for a good personal loan, Replin said he’d try to balance the term timetable with the interest rate.

“For example, if the two- and four-year interest rates are very close in amount, I’d select the four-year term,” Replin said. “If you have any kind of unanticipated (but positive) financial event, you can always prepay the loan.”

Replin said a two-year personal loan term is also known as a ‘bullet loan.’

“That means the loan’s maturity comes at you as fast as a bullet,” he noted. “Before you know it, your loan is due. In my view, longer term with low interest rates is the answer.”

A long repayment schedule is good for your credit. Assuming you make all the personal loan payments on time, going longer is good for your credit score.

“Following payment schedules give a boost to the credit report in several ways,” said Lyle Solomon, an attorney at Oak View Law Group, in Rocklin, Cal. “First, a personal loan is an installment loan which shows that you can manage different types of debt. Second, payment history accounts for 35% of your FICO credit score.”

Loan beauty is in the eyes of the beholder. Higher interest payment over the life of a loan is an obvious “con” with longer repayment schedules.

“However, a bigger con is the temptation to splurge and take on higher debt because of the lower and affordable payments,” said Simon Ikuseru, a certified public accountant, and the founder of walletbliss.com, a personal finance blog. “Suddenly, a $40,000 car looks affordable when the repayment term is 84 months.”

Increasingly, consumers prefer lower monthly payments. When you opt for a monthly payment price break, you’re certainly not alone.

“For example, the average car loan term is now 72 months according to the Experian State of the Automotive Finance Market Report (Q2 2020) [1],” Ikuseru said. “This suggests that borrowers are more interested in making smaller monthly payments than the actual interest rate and loan term.”

The Takeaway on Longer Personal Loan Time Frames

Eventually, a longer repayment time frame comes down to your situation and how it will affect your finances and overall well-being.

“It’s best to weigh the value of saving on interest and reducing your monthly debt load,” Solomon said. “If required, a minor hit to your credit score is still okay in the interest of better financial health over the long term.”

[1] https://www.experian.com/content/dam/marketing/na/automotive/quarterly-webinars/credit-trends/2020-quarterly-trends/v2-2020-q4-state-automotive-market.pdf

How to Use Personal Loans

How Does Debt Consolidation Hurt Your Credit

What to know about personal loans and to use them for paying off debt and more.

Brian O’Connell

Brian O'Connell has been a finance writer at TheStreet, TheBalance, LendingTree, CBS, CNBC, WSJ, US News and others, where he shares his expertise in personal finance, credit and debt. A published author and former trader, his byline has appeared in dozens of top-tier national publications.