How Long to take to Repay a Loan?

There are many types of loans and some you will be able to choose how long you take to repay. You might be able to negotiate a monthly repayment amount or you might have a loan where repayments are flexible; such as a credit card. If you can choose how long you take to repay the loan, then it is a decision that you need to make very carefully. It may seem a really good thing to be able to do, but you need to consider many things including two main factors.

The cost of a loan is not so much to do with the interest rates or charges but how long you have the loan for. This is because loans usually charge interest monthly and the longer you have the loan the more often those monthly interest charges are made. Obviously comparing similar loans and getting the cheapest is worthwhile, but if you If you add up how much a loan would cost if you took it out for a year compared to two years you will soon understand what an enormous difference this makes. This means that the sooner you can pay off a loan, the cheaper it will be for you. So whether you have borrowed money to buy a house or to pay for some groceries, you will save money if you pay it back more quickly. Obviously the amount you save will depend on how much you borrow, the interest rate and how much more quickly you pay it back. Therefore when you are comparing different loans do not just look at the interest rate. Instead it is much more sensible to consider the cost of the loan in total and compare that to see which one is the cheapest.

However, it is important to be realistic about this as well. When you are considering how long you need to repay a loan you need to make sure that you can afford the repayments. If you make the time the loan lasts for, too short, you will find that the repayments will be too high and unaffordable. You might be able to afford to pay a mortgage off in twenty five years, rather than thirty but would be unlikely to be able to repay it in ten years, for example. So you need to be realistic. Make sure that you calculate how much you can afford to repay each month. Look at the amount of money that you have coming in and going out and see how much you can afford to repay. Then consider whether this is a realistic amount for you to always be able to afford or whether you need to pay it over a longer term. It is worth checking to see whether you can make overpayments on the loan. If you can, then you will be able to pay in extra when you have extra money available to do so, rather than making the regular repayments higher than you can afford. You need to consider how you will manage if for some reason you had less income or higher bills as you would still have to make the loan repayments.

It is quite a balanced decision that you need to make. You have to make sure that you can afford the repayments and even if your circumstances change you will still be able to pay them. However, if you make the term too long you will end up paying more money for the cost of the loan overall and this could be unnecessary expense if you can afford to pay more. A compromise is to arrange the loan so that you can make overpayments. However, you need to be self-disciplined so if you do have spare money you pay it off the loan rather than spending it on something instead. This is not always very easy. So making the repayments quite high over a shorter term is a good idea, leaving some leeway in case you find it difficult to manage the repayments. You should then be able to get the cheapest loan that you can but with repayment amounts that are affordable for you, even if your circumstances change a bit.

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