Short answer: a longer term means a smaller monthly payment but more interest over the life of the loan (CFPB). Pick the shortest term whose payment you can make every month without strain, and compare offers by the amount, APR, term and monthly payment together, not by the payment alone (CFPB).
The same loan, three terms
Example, not a quote: $10,000.00 at 14%, no fees, our calculation with payments rounded to the cent. The last column shows what you would still owe after one year of payments.
| Term | Monthly payment | Total of payments | Interest | Owed after 12 payments |
|---|---|---|---|---|
| 24 months | $480.13 | $11,523.12 | $1,523.12 | $5,347.41 |
| 36 months | $341.78 | $12,304.08 | $2,304.08 | $7,118.40 |
| 60 months | $232.68 | $13,960.80 | $3,960.80 | $8,514.95 |
The 60-month loan costs $1,656.72 more in interest than the 36-month loan. It also pays the balance down more slowly, since early payments go mostly to interest (CFPB). That matters if you later want to pay it off or refinance it. How the payment is figured is in the monthly payment formula.
A long term, paid like a short one
If the loan has no prepayment penalty, you can take the longer term and pay more each month when you can. Same example: you take the 60-month loan ($232.68 a month) but pay $341.78, the 36-month payment, every month, with the extra $109.10 going to principal. The loan is paid off in 36 payments and the interest comes to about $2,303.97, instead of $3,960.80 on the 60-month schedule (our calculation). The lower required payment is there if a month goes badly.
- This only works if extra payments go to principal and there is no prepayment penalty; check the contract and see prepayment penalties.
- Ask the lender how to make extra payments so they reduce the principal, and check your statements.
- A longer term with a higher APR is a different trade; compare the APR and total of payments of each offer (how to read a loan disclosure).
How to choose a term
- Start from the payment you can afford every month, including in a tight month, then pick the shortest term that fits.
- Check how the payment changes your debt-to-income ratio; see debt-to-income ratio.
- Don't stretch a small loan over a long term to get a low payment; the interest keeps adding up every month.
- Compare offers on the same term, and look at the APR and the total of payments as well as the monthly payment (CFPB).
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.