Whether you want to renovate your hall, fund wedding venue needs, or consolidate debt, a personal loan can help you with the money you need. Apart from the fact that you can use the loan for any purpose, the provider also grants the freedom to select the best loan term. You can choose any loan term from 1 to 7 years per your finances and life goals.
Most individuals skip this as a part of due diligence. It is important to use the freedom to select the loan term right. You get a limited amount if you choose an extremely short loan term. If you fail to pay within that term, it may appear as a default on your credit report.
Likewise, applying for an unnecessary longer term that you can pay early means paying additional interest costs. Missing payments on a longer term adds to the interest rate and loan costs.
The term you choose determines your monthly payments.
Choosing a longer term implies fewer monthly payments but competitive interest rates. At the same time, the shorter loan term implies high monthly payments and low-interest costs.
It is important to consider everything from credit score, pending loan payments, income, life goals, and cash-bound emergencies before deciding on the loan term.
What is an ideal personal loan length?
The loan terms may vary from lender to lender. However, the ideal term for personal loans in Ireland is 7 years. It is the maximum you can borrow money for.
Any loan with 2-7 years is considered a long-term loan. A loan with tenure (6-12 months) is generally known as a short-term loan.
But the fact is – when you borrow any loan, you usually pay it in fixed monthly instalments. The instalments may differ if you choose a variable interest rate on a longer term. Variable interest rates are usually available only in long-term loans. The interest rate also determines the overall costs of the loan.
For example – You take a loan of €25000 for 3 years for home renovation with interest costs totalling up to €4500, with monthly payments of €188.
Similarly, if you take a loan of €10000 for 7 months for the same purpose, the interest costs reduce to €300, and monthly payments of €1428.
Precisely, choosing a loan term regulates your monthly payments and other charges. The amount you pay depends on many factors, including interest rates and loan affordability. A longer-term increases the costs of borrowing.
5 best ways to choose the right loan term length
Choosing a loan term depends on your liabilities, debts, and life goals, like car purchase or mortgage. Here are a few ways to determine the right loan term:
1) Review your existing budget
Before taking on any loan, analyse whether you can pay it back promptly. For this, you should know the liabilities and expenses. Draft a budget stating every expense and mention your income.
Mention your earnings from different sources like- full-time, part-time, freelancing or investments. Consider emergency expenses too. It will help you decide the right year or months it would take you to complete the loan.
2. Check the monthly payment as per the loan term
Many loan providers grant ample options to choose from regarding repayments. You can use a loan calculator to calculate the difference between a loan for 1 year and 4 years. It will help you decide right.
Never pick up a shorter loan term just because it is more affordable than a longer term in terms of interest rates and other costs. If you fail to pay within that period, you may default. A default harms the credit score, making it challenging for you to qualify for better interest rates in future.
If you have paid bills, have no outstanding credit card balance, and have no mortgage, a shorter-repayment term would be ideal. It also depends on the purpose and urgency of it.
For example, if you have a medical emergency and are cashless, check fast loans in the Ireland marketplace. With this, you may get quick cash for your needs and ease up the pressure.
Here, you generally get a short-repayment term of up to 12 months. The reason is – the amount you get here is small. You can pay it easily with a big lump sum as monthly repayments. The interest rates are competitive. But you can keep yours unaffected with regular payments.
3) Check the additional fees and costs attached
Apart from loan costs and fees, always check the other fees attached. Most lender charge establishment fees, administration fees, loan closure fees, APR, missed payment fees or default costs. At that point, scan the terms and conditions for fees like – early loan termination fee, underwriting fee, loan processing fee, etc. If you spot any such fees, discuss them with the loan provider.
Explore your loan options by basing these loan cost parameters. Choose an option with low APR, Interest costs, no early payment fee and competitive missed payment penalty fee. It would help you make a firm choice and save ample costs on the loan term.
4. Check your credit score and income
Usually, individuals with good credit scores and income get better interest rates and loan terms. If you possess financial flexibility, you can consider a shorter-repayment term. It would help you clear a loan early and help improve your credit score too.
Oppositely, individuals with bad credit history usually prefer shorter terms to boost credit scores. However, one must ensure a healthy monthly income to pay the loan successfully.
If you have too many liabilities and average income, choose a longer-term ideal. It will help you stick to repayments with limited chances of defaulting. You make minimum monthly payments that fit easily within budget and help you clear the loan comfortably.
A longer term is ideal for people seeking comfort on the finance part. It is ideal for individuals with a poor credit history and unstable income and finances.
5) Check for additional incentives on loans
Before applying for a loan, check for the ongoing discounts, offers, or incentives lenders provide. It is like – an interest-free period on credit cards if you apply for the first time. Many lenders host opportunities for first-time borrowers.
Check incentives like- 0 interest month, no missed payment costs, lowest APR loans, or automatic payments. These incentives impact your loan costs positively. It is one of the smart ways to choose the right loan term. Analyse how these incentives help you ensure comfortable payments alongside building credit.
Bottom line
Choosing a loan term requires improvisation on finance and personal liabilities/goals. A loan term defines how well you can manage your payments without stumbling. Pick the one that aligns with your income, credit score goals, and other expenses.
Caleb works as a senior content writer at Financealoan for the past 3 years. He is a writing enthusiast and invests a good time in exploring and writing about financial trends. His keenness in exploring a topic to create a research-based piece is simply unmatched. He believes in including a texture of authenticity with real-time examples and facts.
Caleb’s blogs and articles reveal deep-seated knowledge and expertise. His educational qualification forms the base of his excellent command over the industry and Jargon. He is a postgraduate in Finance and is currently involved in exploring the world of the stock market.
