What Is the Best Term Length for a Personal Loan?

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When you need a chunk of money quickly, a personal loan can save the day. These loans offer a way to handle big expenses with lower interest rates than most credit cards and can be used for just about any reason—from financing your honeymoon to paying for your appendectomy.

You repay a personal loan in fixed monthly installments, but exactly how much time you take to pay it off is often up to you. The personal loan term you choose affects your monthly payment amount and how much you pay in interest over the life of the loan. Here's what you should know to choose the loan term that best suits your situation.

How to Choose a Personal Loan Term Length

A personal loan term length is the amount of time you have to pay back the loan. You can find personal loans with term lengths anywhere from 12 to 60 months and sometimes longer. A longer term length means lower monthly payments, but higher interest costs in the long run. To keep the cost of the loan down, you should look for the shortest loan term you can get while still keeping monthly payments manageable.

The term length isn't the only factor to consider when applying for a personal loan. You should also pay attention to these other factors:

  • Interest rate: The interest rate of a personal loan is usually shown as an annual percentage rate (APR), which includes fees and other costs in addition to interest. A higher APR means the loan will cost you more, so it's advantageous to get the lowest interest rate you can find. Lenders typically publish APR ranges for personal loans online, making it easy to check out several different lender sites to compare. According to Experian data, as of Q2 2019, the average interest rate for a personal loan was 9.41%.
  • Fees: In addition to interest, lenders typically charge fees when they issue a personal loan. These are either added to the loan balance or subtracted from what is disbursed to you; the cost of fees will be expressed in the APR.
  • Funding time: How long will the loan approval process take, and once you're approved, how quickly can you get your money? It depends. Online lenders typically pay out very quickly, with some even offering same-day deposits. Banks and credit unions, however, take longer to approve and disburse loans, so you might have to wait a few weeks to complete the process.
  • Extras: Look for special incentives lenders may offer or other ways to lower your interest rate or fees. Some lenders will give you a discount for applying online or setting up automatic payments, for example. Others will reduce your interest rate if your credit score rises or if you make on-time payments for a certain period.

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How to Get a Personal Loan

You can get personal loans from banks, credit unions and online lenders, but there are a few important differences among the three sources.

  • Banks can be a good place to start when investigating personal loans, particularly if you already have a relationship with one. However, banks typically charge higher interest rates for personal loans than credit unions or online lenders; they also tend to have stricter credit standards. If you have good credit, and if being able to visit your lender in person or having the flexibility to make loan payments online, by check or in person is important to you, a bank can deliver.
  • Credit unions are nonprofit financial institutions designed to serve certain members, such as teachers, association members or people who live in a certain area. They usually offer lower interest rates and less stringent credit requirements than banks, which can make it easier for those with less-than-perfect credit to get approved for a personal loan. You'll need to join a credit union before applying for a personal loan; this usually involves opening an account and depositing a minimum amount of money. Be aware that credit unions may not provide convenience features like a mobile app, and you might have to make your payments by check.
  • Online lenders don't have physical branches you can visit. This means they can operate with less overhead than credit unions or banks and, in turn, may pass that savings onto borrowers in the form of lower interest rates on personal loans. Some online lenders cater to people with poor credit, which can be helpful if you've had trouble getting a personal loan elsewhere. Speed is another plus for online lenders—in some cases, you can apply for a personal loan online, get a decision and access your loan funds all in the same day. If borrowing money entirely online sounds risky to you, working with a well-established online lender can ease your fears.

What Credit Score Do You Need to Get a Personal Loan?

Because different lenders have different criteria for making personal loans, it is possible to get a personal loan with a lower credit score. However, having a FICO® Score of 670 or higher will give you many more options, including more lenders to choose from, lower interest rates and better loan terms. If your credit is fair or poor, lenders will consider you a riskier borrower. You may still be able to get a personal loan, but you'll likely have to accept a higher interest rate and fees.

In addition to your credit score and credit history, lenders assessing your financial responsibility will also consider the amount of savings or other assets you have available, how stable your income is and how much of your income goes to debt (your debt-to-income ratio). If you have no savings and half of your income is going to pay off credit card debt, you'll be viewed as a bigger credit risk than someone who has a hefty savings account and little to no credit card debt.

You should check your credit score and review your credit report before applying for a personal loan. If you're worried that your score will keep you from getting a personal loan, here are some things you can do to improve your credit score:

  • Pay your bills on time. This is the most important factor in your credit score, so mark your calendar—or better yet, set up automatic payments.
  • Reduce your credit utilization ratio. This ratio, which measures the percentage of available credit you actually use, can start to harm your credit scores as it approaches or climbs above 30%. Limit your use of revolving credit, such as credit cards—the lower your ratio, the better it is for your scores. Maintain low balances or, better yet, pay the cards off in full each month.
  • Avoid applying for new credit cards. Each application means a hard inquiry on your credit report, which can cause a temporary dip in your credit score.
  • Keep old credit accounts open, even if you aren't using them. Having older accounts on your credit history shows you've been using credit for a long time, which helps improve your credit score.
  • Sign up for Experian Boost®ø. This free service reports your on-time cellphone and utility payments to Experian. Since these payments typically aren't reported to credit bureaus, adding them can help boost your credit score.

Once you get a personal loan, making your payments on time and in full will help maintain your positive credit score.

Finding the Right Personal Loan Term

The personal loan term length you choose can affect how much you'll pay each month and how much you'll pay in total interest over the life of the loan. However, term length isn't the only factor to consider when weighing different personal loans. The lender you choose, your debt-to-income ratio and your credit score can also have a big impact on how much your personal loan will cost. Checking your credit score, and improving it if necessary, before you apply for a personal loan can not only help you get the loan you need, but also get the best possible loan terms.