Whatever you are going to do, if you are about to borrow money – whether you have your eye on a new car, want to renovate your house, or simply need a new washing machine – the term of your loan is very important. This determines how long it will take you to repay that loan. How does this work exactly? In this article, we will explain it to you.
The term of your loan
Imagine you choose a long term because you think your monthly payments will be lower. It may sound attractive to pay less each month, but keep in mind: the longer you take to repay, the more interest you will pay. This means that you will ultimately spend more money on the same loan. Therefore, try to pay off that loan as quickly as possible, but with monthly payments that you can afford without stress.
How long are you tied to this type of loan?
With a personal loan, the terms range from 6 months to a term of 15 years or 180 months. You choose your term, and it is fixed. Good to know: with most loans, you can make extra payments whenever you want, which shortens the term. But be careful, sometimes this costs extra. Always check the fine print!
Which term suits me?
Do you want to see how different terms affect your monthly payments? On various websites, you can find that it’s quite simple to discover this. Just check with that comparison tool, and you’ll quickly find the term that suits you.
What does the term do to the costs?
Let’s give you an example: suppose you borrow €10,000. If you choose a term of 36 months, your monthly payments will be the highest, but the loan will be the most cost-effective in the long run. If you go for 60 or even 120 months, you will see that the monthly payments decrease but the total cost of your loan increases. In other words, borrowing for a shorter period is usually more economical.
In short, when choosing the term of your loan, it’s about finding a balance between what is feasible for you each month, but also ensuring that you do not end up with a much larger amount than your original loan amount. A longer term means lower monthly payments, but it also ends up being more expensive. So choose wisely with monthly payments that you can easily manage, and try to limit the duration of the loan as much as possible. Borrowing money costs money.
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