It all depends on how high the loan is and what financial options you have when paying in installments. Basically you can say: the shorter you choose the term, the cheaper the loan. Because you pay less interest to the bank with a short term.
These factors affect the runtime
Choosing the best term for an installment loan depends on several factors. In short, there are three factors:
- Type of loan
- Amount of the loan
- Monthly rate
Some loan offers and their conditions are tied to a fixed term from the outset. Such a term is often used for zero percent financing. The provider stipulates, for example, that the washing machine must be financed over twelve months so that the customer receives the zero percent conditions. Credit platforms are currently even advertising with negative interest rates. The borrower repays fewer loans than he takes out. But these offers also only apply to a certain amount, which must be paid within a specified period. The amount of the installment and the duration of such offers are fixed. The borrower therefore has no choice with this type of loan.
Another factor that plays a role in choosing the term of a loan is the amount of the loan. In general, small amounts of credit can be financed in a shorter term than large amounts. A consumer loan of 3,000 dollar can usually be financed faster than a car loan of 20,000 dollar. Last but not least, the term of your loan also depends on your financial options. Can you spend 100 dollar on the monthly installment or maybe 300 dollar? That makes a big difference in terms of the term you choose.
Effects of the chosen term
You can usually choose terms in six-month increments (six months, twelve months, 18 months, etc.). Choosing a term has an impact on the costs you incur. For the bank to lend you money, it charges interest. And the longer the term of your loan, the longer you pay interest. At the same time, the monthly rates for a longer term are lower than for a short term. The following sample calculation illustrates the effects of the term on credit costs:
Table: Effect of the term on the installment amount and interest payments
As you can see, the choice of term has a particularly significant impact on the amount of interest paid and the amount of the monthly installments. The total amount of interest for a ten-year term of the loan is more than twice as high as for the five-year term. However, the monthly rate for the shorter term is around USD 125 higher than for the long term.
It is therefore not possible to answer a general question as to which term is best for your loan. It always depends on the individual loan situation and the individual financial possibilities of each individual borrower. When looking for a loan partner, our installment loan specialists deal with precisely these individual aspects and work with you to find the loan that is most convenient for you and has the best term for you.