Length of Loans
Do you know that in many instances, lenders offer more than one loan term? Whether it’s a car loan, a personal loan or a mortgage, you may be under the impression that there are certain terms that are carved in stone: 60 months for a car loan or personal loan and 30 years for a mortgage loan. The truth is that although these loan terms are very common, you actually have quite a bit of say in the amortization schedule of your loan.
There are different loan scenarios that make both short and long term loan terms make a lot of sense. When you decide on what length of loan you want, take into consideration a few factors that can help you realize which option is best:
Interest Rates: In general, the shorter the term of the loan, the lower the interest rate. Some lenders offer premium interest rates to people who accept a shorter loan term, such as a 15 year mortgage loan instead of a thirty year term. This is also quite common with auto loans; once a borrower goes over the standard 60 months it’s not uncommon for the interest rates to take a jump up.
Total cost: It’s no secret that the best way to save money on any type of loan is to pay it off early, but this same idea can be applied to the original loan terms. The shorter the loan term, the higher the monthly payment and the more quickly the principal is paid down. As the principal balance is reduced, so is the amount of monthly interest charged.
Monthly cost: Although a shorter loan term is great if you can afford it, sometimes it makes sense to stretch the terms out as far as possible in an attempt to make the monthly payment as little as possible. This can make a huge difference in getting approved for any type of loan. You may not be able to afford a monthly car payment of $578 for $25,000 for 48 months at 5%, but you may be able to afford a monthly payment of $420 for the same amount stretched out to 72 months at a higher interest rate of 6.5%.
Accepting a shorter term will save you money in the long run, but if the only way you can afford to get the loan is to accept a longer payment schedule then this may be your only option. Use an amortization calculator to take a look at your different options and choose the loan payment that allows the shortest term without stretching your budget too thin.
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