A personal loan is an unsecured loan that can be used for almost any purpose. Personal loans are offered by banks, credit unions, online lenders, and other financial institutions. They provide funds that can be used to consolidate high-interest debt, finance large expenses, or cover unexpected costs.
When taking out a personal loan, one of the key factors is the loan term or length of the repayment period. Loan terms generally range from 1 to 7 years for personal loans. Selecting the right loan term is important, as it impacts the monthly payment amount and the total interest paid over the life of the loan.
So what exactly is the longest term available for a personal loan? Let’s take a closer look at personal loan terms and how lenders determine the maximum length.
Typical Personal Loan Terms
Personal loans usually have repayment terms ranging from 12 months up to 84 months (7 years). The most common loan terms are 3 and 5 years.
Here is an overview of the typical personal loan term options:
– 12 months – 1 year term
– 24 months – 2 year term
– 36 months – 3 year term
– 48 months – 4 year term
– 60 months – 5 year term
– 72 months – 6 year term
– 84 months – 7 year term
As you can see, 7 years (84 months) is the longest term commonly offered for personal loans.
However, some lenders may offer longer maximum terms of up to 15 years for very large personal loans. For example, Lightstream offers personal loan terms up to 15 years for loans over $100,000. But for standard personal loans under $100k, you usually won’t find terms beyond 7 years.
Now let’s look at how lenders determine the maximum loan term they will provide.
How Lenders Determine the Maximum Personal Loan Term
Several factors impact the maximum term a lender is willing to offer for a personal loan:
– Loan amount – For larger loan amounts, longer terms may be available. Lenders want to ensure the monthly payment is affordable based on income.
– Credit score and history – Borrowers with excellent credit scores and history may qualify for longer repayment terms than those with poor credit.
– Debt-to-income ratio – Lenders will look at your monthly debts compared to income. If you have a low DTI ratio, you may be approved for a longer term to lower the payment.
– Income stability – Steady employment income often allows for longer terms compared to those with fluctuating self-employment or gig economy income.
– Interest rates – With longer terms, lenders will charge higher interest rates to account for the additional risk.
– Loan purpose – Loans used for necessities like medical expenses may have longer terms than those used for vacations or luxury purchases.
– Regulations – Federal, state, and lender regulations may cap maximum loan terms allowed. For example, the Military Lending Act caps terms at 36 months for active duty military.
Essentially, lenders want to make sure longer loan terms do not become unaffordable burdens. They will balance term length with factors like your income, total debt, credit history, interest rate, and loan purpose.
Pros of a Longer Personal Loan Term
While 7 years is the common maximum term, there are some pros to securing an even longer personal loan term if possible:
– Lower monthly payments – A longer term means lower payments each month, increasing affordability.
– Ability to borrow more – With lower payments, you may be able to qualify to borrow a larger amount.
– Flexibility – Smaller payments free up monthly cash flow that can be directed to other goals.
– Pay off high-interest debt – Lower payments allow you to consolidate debt over time.
For all of these reasons, some borrowers seek out the longest term available to keep the monthly payment as low as possible. However, there are also some potential downsides.
Cons of a Longer Personal Loan Term
Here are some of the cons that come with longer personal loan repayment terms:
– Higher interest charges – You will pay more in total interest the longer the term length.
– Higher origination fee – Some lenders charge higher origination fees for longer term loans.
– Less flexible – You are committed to a payment for more years, reducing financial flexibility.
– Building equity – Unlike a mortgage, a personal loan does not build home equity or ownership of an asset over time.
– Credit score impact – A higher loan balance for more years can negatively impact your credit utilization ratio.
As you can see, longer loan terms come with higher borrowing costs and less flexibility. That’s why it is important to select the shortest term that you can afford comfortably based on your budget.
What is the Ideal Personal Loan Term?
So when considering a personal loan, what is the ideal loan term length you should choose?
Here are some tips for selecting the best personal loan term for your needs:
– Choose the shortest term you can afford – Minimize interest charges by paying the loan off quickly.
– Review your budget – Make sure you can make the monthly payment comfortably.
– Consider one-time expenses – Shorter terms for luxury or discretionary purchases.
– Factor in your credit – A longer term may help those with poor credit qualify and afford payments.
– Assess interest savings – Plug loan details into a calculator to estimate interest for different terms.
– Evaluate early repayment options – Many lenders do not charge early payoff fees.
– Get prequalified – Shop and compare loan terms and rates from multiple lenders.
The ideal term comes down to your unique financial situation. Just make sure you can afford the monthly payments you’ll owe. A personal loan payment should not exceed 20% of your take-home pay.
Tips for Getting Approved for a Longer Personal Loan Term
If you need a longer personal loan term, either for affordability or borrowing a larger amount, here are some tips that can help with getting approved:
– Have excellent credit – Shoot for a FICO score of at least 720 or higher.
– Lower your DTI ratio – Pay down existing debts so you have less monthly obligations.
– Provide steady income – Have at least 2 years of stable job history on your application.
– Borrow from a credit union – Credit unions frequently offer up to 12-year loan terms.
– Apply for a secured loan – Using an asset like a savings account as collateral can allow longer terms.
– Add a cosigner – A cosigner with good credit may help you qualify and extend the repayment period.
– Know lender requirements – Review term options from lenders before completing an application.
– Explain your need – Clearly stating how a longer term will benefit you can help your case with underwriters.
By taking these steps, you may be able to secure approval for a longer personal loan term from 6 to 12 years in some cases.
Conclusion
While 7 years is the standard maximum term for most personal loans, some lenders will offer longer repayment periods in specific circumstances. For large loans above $100k, terms up to 15 years may be possible depending on the lender. Factors like your income, credit score, total debt burden, and loan purpose will determine the maximum term you can qualify for.
A longer term can make borrowing more affordable but results in higher interest costs over the full repayment period. Be sure to weigh the pros and cons. Often the ideal term is the shortest one you can manage based on your current budget and expenses. This lets you pay off the loan quickly and save on interest expenses.
