Personal loans are the most convenient loans when you need a chunk of money without further ado. These loans are not subject to collateral, and the processing does not take too much time; the approval of these loans is faster.
When you apply for a small loan like an urgent doorstep loan, you will be signed off on the same day. However, when you borrow a larger sum, it will take some time to determine your repaying capacity as the debt is to be paid off over a long period of time.
At the time of borrowing a paltry sum, everybody knows you will not be given a long period to repay the debt. You will pay it off in full on the due date.
But when you are to borrow a larger sum, say, £5,000, you will have a choice to choose between the repayment terms. Some borrowers think that it is good to choose a shorter repayment period, while others think that it is good to choose a longer repayment period.
A lender will decide the repayment length
When you apply for a loan, a lender will determine your repaying capacity before giving the nod. It involves an affordability check that includes a check of your credit score and your income sources.
Based on your monthly expenses, a lender will see the room in your budget for an extra payment. This will help them set the monthly instalment. The size of the monthly instalment will determine the repayment length.
When you choose a smaller repayment term, the monthly instalments will be bigger. You will get rid of debt sooner, and the best thing is that you will save a lot of money in interest. Choosing a longer repayment term can make the moan more manageable, but it will cost you a lot of money in total.
Example 1: when the repayment term is 5 years
| The size of the loan | £5,000 |
| Interest rates | 9.5% |
| Monthly payments | £104.06 |
| Total amount repayable | £6,243.51 |
| Total interest payments | £1,243.51 |
Example 2: when the repayment term is 3 years
| The size of the loan | £5,000 |
| Interest rates | 9.5% |
| Monthly payments | £159.25 |
| Total amount repayable | £5,733.16 |
| Total interest payments | £733.16 |
| Saving on total interest | £510.35 |
You can pick a longer repayment plan
If you are not confident that you will manage to repay the debt on time, you can ask your lender to put you on a longer repayment plan. A responsible lender will certainly help you to pick a deal that best suits to their budget. The repayment term of long term loans for bad credit could be between 12 months and five years.
It makes sense to choose a shorter repayment period when you want to save money on interest. However, do not opt for it unless you are sure about your repaying capacity. However, you cannot decide whether you have a cheaper deal or not just based on the repayment length of the loan. You will need to take other factors under advisement as well:
- APR
APR is an annual percentage rate. The monthly instalments will be determined based on the APR. It includes fees and other costs in addition to the interest rates. The APR varies by lender. You should always try to pick a deal with a lower APR, as it helps save money in interest.
“The average interest rate of a personal loan is 9.5% for borrowers with a good credit score.”
But it could be as high as up to 35% when your credit score is gloomy.
- Fees
In addition, you should look at fees. A lender will charge upfront fees or loan origination fees. You will also have to pay closing fees after the loan term comes to an end.
These are added to your personal loan and revealed in the loan agreement. Ask about the fee structure when you are comparing the loans.
Some lenders charge early repayment fees and monthly fees. However, others do not. You will get a cheaper deal when these fees are not added to the bill.
- Funding
Personal loans are quickly processed, but it does not mean that you will get them on the same day, especially when you are borrowing a larger sum. If the loan amount is less than £1,000, you will probably get money the same day.
Even if lenders claim the funding of these loans to be very quick, you should check out how quickly you can get funds. Online lenders can process the application faster than banks and credit unions. The latter may take a couple of weeks, so they are a better option only when you can wait for that much time to complete the process.
- Concessions
Some lenders may offer you special discounts or concessions to lower your interest rates. This is generally possible only when you are borrowing from a lender from whom you have borrowed money before.
They might waive the fees, and this will significantly lower your interest payments. Some lenders may ignore closing fees and allow you to repay on time without charging early repayment fees.
The final word
Personal loans can be long-term as well as short-term. They both have some advantages and drawbacks. For instance, the former reduces the size of monthly payments while the latter helps you save money in total interest. Which repayment size you should look for depends on your financial circumstances.
If you cannot repay the debt when monthly instalments are considerably big, you should try to opt for a longer repayment plan even though it costs you high interest in the long run. However, you should choose a shorter repayment term when your budget is strong. It will help save a lot of money.
Anna Johnson has more than 11 years of experience in direct lending industry of the UK. She is the Senior Content Editor at 24cashflow where she is leading a large team of loan experts. During her career, she has helped the loan aspirants to use the particular loans in the best way and improve their financial lives and status.
Anna Johnson is known for her in-depth research of the UK loan marketplace, as she has worked with many major lending firms in her career. During her educational phase, she has done a research on ‘Finance Fundamentals for Growing Business’.