Compare Personal Loans Australia

News  
 

Why you should get the shortest term loan possible


September 30, 2010

The term of a loan is an important and often “underlooked” factor when applying for a new loan. But because the loan’s term can affect the total amount of interest paid as well as the affordability of each repayment, it should be carefully considered before accepting the loan.

There are two effects to the loan’s term, which can be misleading when the borrower is only looking at the repayments. First, the total interest paid increases with the duration of the loan. If there’s a 10% interest rate charged on a $5,000 loan, then over a ten-year term almost twice as much interest will be paid as there would be over a five-year term.

This higher interest effect is masked by the other effect of a loan’s term, which is that a longer term spreads the repayments over more months. It’s simple mathematics: the more months divided into the principal, the lower the payment amount will be. If there is a $2,400 loan, the repayments will be $200 per month for a 12-month loan, but $100 for a 24-month loan. This means that although the total amount of interest charged—the cost of borrowing the money—is higher, it will appear lower on a month-by-month basis.

Also, lenders will sometimes charge a higher interest rate for a short-term loan than for a long-term loan. But this doesn’t offset the duration effect of the term. Usually the total amount of interest charged for the loan will still be somewhat higher for the longer term loan despite the lower interest rate.

A borrower considering a loan should opt for the shortest term loan that is affordable, as long as the interest differential is not more than a couple of percentage points. This will minimise the total amount of interest charged, which can be a large cost for a loan. As well, the borrower should consider whether the repayments are affordable, and an affordability gap should always be allowed.
 
Next »


Need a feel for now much you can borrow and how long your loan will take to pay off? Our personal loan repayments calculator will allow you to work out your
monthly repayments... Try it now...

Personal Loan News

Why you should get the shortest term loan possible
Lending has increased, but consumers continue to minimize debt
Benefits of a Business Credit Line
More..

Follow us Facebook


Subscribe to Newsletter
Enter your email below to join our Newsletter
First Name:
Last Name:
Email:
Phone:



About Us | Legal | Contact    

© 2013 Copyright Personalloan.net.au. All rights reserved.

The personalloan.net.au brand and logo are trademarks of Pixel Capital Pty Ltd. Operated by Credit World Ltd ABN 11 128 435 861, Australian Credit Licence Number 397589, Credit Ombudsman Service Number M0008295.

* The products compared on this page are chosen from a range that CreditWorld.com.au has access to track applications from and is not representative of all the finance products available in the market. You should always consider seeking independent financial advice and your personal financial circumstances when comparing loan products.

Reasonable efforts are made to maintain accurate information. However, information is presented without warranty. When you click on the "Apply Now" button you will have an opportunity to review the product terms and conditions on the product issuer's web site. Even though we provide information on financial products in Australia we are not a credit provider nor are we suggesting that you apply for any particular product from any of the providers listed.