The length of a loan can determine a variety of the loan's finer points, not least of which is the repayment amounts and cost of credit.
Actual loan amount, APR and term may vary based on actual application details.
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As anyone who has gone hunting for a personal loan can attest, there are a lot of options to consider, from the loan amount, to the rates and terms, to the loan's length. When it comes to typical ‘short-term loans,’ the loan length — or repayment period — is brief, generally a few months or less. On the other hand, instalment loan lengths come with more variability, and can be anywhere from a few months to a number of years.
"Thanks to the longer loan term, these loans are distinct from payday loans..."
As for 36-month loans, the loan length is obvious — 36 months, or about three years. Most 36-month personal loans will fall into the category of instalment loans. Additionally, a 36-month loan could be secured, unsecured, or guarantor.
Once the decision has been made to take on a loan, the very first question must be, "What is the right loan for me?" While urgency can end up playing a role, it's important to make sure, first and foremost, that the loan you take on will actually improve your financial situation in the long run. This is no less true when assessing the loan's length.
In considering a 36-month loan, or any longer-term loan, the duration of repayment is obviously a key factor. Taking on a 36-month loan means agreeing to 36 months of repayments. While this can be a benefit — with a loan of this type, the longer the repayment period, the less each repayment could be — remember that in most cases, each repayment will include its own interest payment. This means that on a 36-month loan, there could end up being 36 months of additional interest payments as well, meaning the total cost of credit could be higher. Because of the longer loan length, and because every loan requires financial planning to ensure it is paid off in full and on time, a 36-month loan borrower should actively be planning their finances and managing a budget during the term of the loan — or for that matter, whenever they can!
"With a constant loan amount, the longer the repayment period, the less each repayment will be…"
In the case of nearly every type of loan, a lender will charge interest to cover the perceived risk of lending to the borrower. However, while a majority of lenders use interest rates, the way these rates are structured and their amounts can vary dramatically from one lender to the next.
The way a lender chooses to structure their interest rate can be seriously affected by the length of the loan, because the length of a loan — among other factors — can change the way they recoup the cost of providing it. This is also known as the lender's risk, and depends a great deal on the loan type.
Different people have different reasons for taking on a short-term loan. In many cases, unexpected emergency expenses can result in this need. In addition to having shorter terms, these loans are often for lesser amounts, and may come with a higher-than-average interest rate. That said, these loans are not limited to customers with less-than-perfect credit, but can cover a variety of needs and variety of customers.
"With the larger amount comes a larger degree of risk."
A long-term loan is typically for a larger amount than a short-term loan, and with the larger amount of funding comes a larger degree of risk. To balance this increased risk, lenders will often loan to borrowers with a good credit history.
As with any loan, having a clear plan of action is key to ensuring you'll be able to repay in full and on time. In the case of long-term loans, the borrower has an added advantage: a planned repayment schedule. Because a long-term loan is likely to be some kind of instalment loan, the repayment schedule will be set from day one, meaning the borrower knows precisely when and how much to repay. When it comes to creating a budget, and saving your funds, this is a huge advantage.
There are two key things to know when you go about building a budget.
The first is having a clear idea of how much you spend. This means taking a hard look at your finances, where your money goes and how much of your spending is consistent from one month to the next. While you may not end up using all the information you gather, understanding the nuances of your spending habits is the best way to anticipate when you may need to tighten your belt a bit to make payments on time.
"Whenever possible, give yourself a buffer of funds past what you need to repay."
The second aspect of creating a budget is knowing how much you make. Understanding your spend is important, but it's information you can only take advantage of by putting it alongside your income.
Once you have these two pieces of information, you can more easily calculate the money you have left over, once all your monthly spending has been completed. This is the amount you should be using to determine what you can set aside for a monthly repayment amount. And bear in mind, if you find yourself with £500 of additional funds once you have made all of your monthly payments, that doesn't mean you should take a loan with a £500 monthly repayment. Whenever possible, give yourself a buffer of funds past what you need to repay.
Personal loans are known as "personal" because their uses are dictated by the user. While a car loan or a mortgage loan come with preset functions, a more general personal loan can be used based on the borrower's needs. While one borrower may have a hole in the roof that needs to be repaired, another might have unexpected car troubles, and a third could have a planned expense, such as remodeling a home. The point here is that the uses of a personal loan can be as varied as the people doing the borrowing.
Still, a personal loan is a very real commitment, with hard timelines for repayment and severe consequences for not repaying on time and in full. Should you consider taking on a personal loan, be sure that you can repay the full amount when you're supposed to.
The most important thing to understand when considering the variety of different loan types and lengths available to you is that the amount you're borrowing will affect the length of the loan, and vice versa. That is to say, while a smaller loan amount may not require a long repayment period, and could result in a short-term loan with a single repayment, a larger loan amount almost certainly will require a longer term, and is more likely to come as an instalment loan.
This means that choosing a loan isn't simply a matter of choosing the loan amount. You need to factor in the repayment term that will come with that loan as well. This means that if repaying a long-term loan — such as a 36-month instalment loan — isn't something you can reasonably plan on doing, you may need to borrow less in the interest of keeping your loan term short. Alternatively, if you have the income and are able to budget for a loan repaid over a longer term, you may be able to borrow a larger amount of funds as well.
This is the big question for anyone in need of extra funding. By ensuring that you find the "right loan for you," you're doing a lot to help yourself repay that loan in full and on time, which is the ultimate goal.
The first step in this process is having a clear and complete understanding of your own financial situation. Is your need for extra funding an emergency, or something that can wait a little bit? For instance, fixing a hole in the roof is more urgent than carrying out cosmetic home repairs. While either case should be approached with care and caution — a loan is a serious commitment, and should always be treated as such — a planned expense doesn't have the same urgency as unplanned expenses. This means you can take more time in assessing various lenders, and ideally, make sure that you have explored every avenue before taking on a loan.
No matter what reason you're taking on a loan, you should always have a clear understanding of what you can afford to repay, whether in the case of a one-repayment short-term loan, or a multiple-repayment long-term instalment loan. Taking on a loan and finding yourself unable to make the repayments you promised the lender you would make is a serious problem, and is likely to leave you in worse shape than you were when you considered borrowing in the first place. This is why taking on a loan requires planning in advance, regardless of the urgency the borrower may feel.
The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.