The loan term is the time until a loan is repaid in full. A loan term is generally set when the loan is taken out, but can also be influenced, for example, by special payments during the term of the loan. Special payments generally shorten the entire term.
The loan term is one of the three factors that are instrumental in calculating the monthly rate. These three factors are:
- loan amount
- interest rate
- Loan term
While the lender ultimately sets the interest rate, the borrower usually determines the loan term and the loan amount. With the term, in particular, you have the opportunity to structure your loan in a way that you can best serve.
Because while the loan amount is often influenced by external factors such as payment obligations of a certain amount, you can choose the loan term completely freely and thus have a great influence on your monthly installment.
What loan terms are usually offered?
The loan terms are usually given in months. Information is rarely given in years since you also have to pay your loan installments monthly and not annually. You can find the following periods for most loans in our loan calculator:
- 12 months
- 24 Months
- 36 months
- 48 months
- 60 months
- 72 months
- 84 months
- 96 months
- 108 months
- 120 months
In some cases, very short periods of 6 months are also offered, but these are usually between the terms of one year to 10 years. Which term is really the best for your installment loan depends on various factors such as your liquidity or the payment of larger amounts.
Sometimes you can only afford a certain monthly rate; then the term of the respective loan installment must be adjusted. If you expect a larger amount to be paid out, you can also choose longer terms and then pay the rest immediately with a special repayment. Pay attention to online loans with a free total repayment.
Good Credit Tip: A longer-term often means a slightly lower rate, but the bottom line is significantly higher loan costs in the form of higher total interest costs. This is because, on the one hand, you have to pay interest over a longer period of time and, on the other hand, because the interest rates generally rise when you choose a longer-term. Therefore, the shorter the term of the loan, the lower the total cost of the loan.
Why does the loan term affect the amount of the installment in particular?
The monthly installment is made up of the interest to be paid and the necessary repayment so that the loan taken out can be repaid in the planned period. So the longer the loan term, the lower the monthly repayment. Such loans are also called annuity loans and the monthly installment is, therefore, the monthly annuity. An annuity is the sum of the interest and the repayment.
Since the monthly loan rate remains constant over the entire term, the relationship between interest and repayment changes within the annuity. Because the interest accrues monthly on the current remaining debt. Since a monthly repayment is also made by the repayment portion in the annuity, the residual debt is also reduced monthly and thus automatically the interest payment for the following month.
When does a longer loan term make sense?
For most borrowers, a longer loan term is particularly useful when the loan amount increases. The reason for this is very simple: a shorter loan term is not financially feasible for many borrowers with higher loan amounts, since the monthly installments can increase very quickly.
However, with a longer loan term, there are some. Once you have decided on a longer-term, you should also be aware that you have to bear the monthly charge over the entire term and cannot use the corresponding money in any other way. The credit rate should also be chosen in such a way that you can still create reserves in addition to the financial burden in order to cope with unpredictable situations. Because the next two to three years can be planned and if you have financial reserves, you can perhaps take out a loan over a certain period of time in the event of sudden unemployment or a serious illness with loss of continued wages.
The longer the credit period, the more difficult future risk planning will be. Sometimes, unfortunately, you have no influence on whether the job is terminated or an accident occurs in road traffic. That is why it is advisable to take out residual debt insurance (RSV), especially with long credit terms of more than four years. Depending on the form of the contract of residual debt insurance, this takes over in the event of unemployment, lengthy illness or death of the borrower and bears the remaining debt in these cases.
Especially in the event of death, this type of protection is very important for the bereaved, so that in addition to grief over the loss of a loved one, there are also considerable financial difficulties for the bereaved. Read more in our residual debt insurance guide.
What you should also consider when choosing the loan term
As already mentioned, the loan term in many cases depends on your economic situation. However, you should also consider a few other aspects, especially for earmarked loans.
In the case of a car loan
Are you buying a new car and planning to drive it for a longer period? Then a longer loan term can make sense. However, if you buy a used car that is a few years older, a loan term of over 10 years, for example, runs the risk that you will pay for a car loan, but your car will no longer be driven by you. In principle, the duration of the financing of a car purchase should not exceed the planned usage time of the vehicle (the same also applies to a motorcycle loan).
Even if you buy a new car, but generally tend to buy a new car every two or three years, you should refrain from a long loan term. The residual value of a vehicle falls rapidly, especially in the first years of use. After three years, a new vehicle is only worth 50% of the list price, according to an evaluation by Allianz. In addition, in many cases, you cannot necessarily influence impairments yourself if e.g. B. an accident not caused by the fault. Even if you have the repair carried out professionally in an authorized workshop, your vehicle will then be considered an accident vehicle and will from then on be significantly less worth reselling.
In the case of a loan to finance a trip or wedding
Would you like to take the trip of a lifetime and no longer want to save on it? Then an installment loan can be the right solution. But here too, too long a loan term can become an unpleasant burden. Because with a loan you tie up part of your liquid funds for the entire term of the contract. Now go on a trip for which you take out a loan and agree on a loan term of several years.
You will still bear the monthly financial burden from your credit for years to come, even if your trip has been long behind you. Of course, you have the collected memories for your whole life, but financing should not tarnish them afterward. Decide for yourself what is more important to you: save even more years and then go on the trip, or better go now and remove later.
Numerous couples also save money for their wedding and may only unnecessarily delay the date. With a cheap wedding loan, the wedding can of course also be financed without a guilty conscience. As long as the financial situation allows, there is no reason not to fund the wedding than to cut back on this special day because you did not save enough. Read more about this in our wedding credit guide.
How can you also influence the loan term when taking out a loan?
By opting for a personal loan with possible one-off payments or special payments. If you have the opportunity to repay parts of the loan in the meantime, the term is sometimes reduced in one fell swoop. Many banks take advantage of this option but a decimal point or two behind the decimal point. In loan comparison from Good Credit, you will find numerous banks with a free special repayment.
In some cases, loans with a free total repayment are also offered. You can theoretically use such loans as instant loans because you can repay them at any time. The loan term then only represents the maximum term that you can get out of the loan contract by paying the remaining debt.