Choosing the right loan duration is the right compromise between the lowest possible rate and repayment capacity. In fact, the shorter the term of a loan, the lower the rate. But the shorter the duration, the higher the monthly payments to be reimbursed. The credit duration is directly associated with the conditions for obtaining a credit.
What credit term should you choose?
The repayment tenure is a determining criterion when applying for credit. Fixed at 120 months (10 years) maximum in the case of consumer credit, the credit duration has an impact on the APR rate, as well as the total cost of the credit. Above all, it is necessarily linked to the nature of the project. Thus, a work loan of $ 50,000 will only rarely be repaid over one or two years. On the other hand, a small revolving credit of 3000 $ can most often be the subject of a credit over 12 months. To properly estimate the duration of repayment of your loan, you must:
- Calculate the amount of credit identified for your project.
- Precisely estimate its monthly repayment capacity, by deducting current expenses (rent, invoices, etc.) from its income. The “remainder to live” must be sufficient once all costs have been calculated.
- Use a credit simulator, an essential tool to find the best rate associated with the desired credit term.
The total cost of a loan is less important when the repayment period is shorter, but the risk is to be faced with overpriced monthly payments. There is no point in reducing the duration of the loan if the associated monthly payments do not correspond to its repayment capacity. This practice leads straight to a refused credit.
Duration of credit: what impact on rates?
The duration of repayment of a loan has a real impact on its APR rate. Our comparison of the best rate for a personal loan of $ 8,000 over 12 to 48 months shows, however, that the rate is not always better when opting for a shorter credit term.
|For a personal loan $ 8,000||APR rate||Monthly fees||Total cost of credit|
|Best offer over 12 months (1 year)||1.70%||672.77 $||$ 73.24|
|Best offer over 24 months (2 years)||2.90%||343.36 $||240.64 $|
|Best offer over 36 months (3 years)||3.60%||243.57 $||444.52 $|
|Best offer over 48 months (4 years)||3.19%||177,59 $||524.32 $|
The best rate of the personal loan $ 8000 over 12 months is in our case much more interesting than that over 24, 36 or 48 months. Only downside, the monthly payments reach $ 672.77. Very few people are able to repay such a sum each month.
The credit over one year is generally reserved for small amounts (less than 3000 $), or for individuals with high incomes.
Duration of repayment: what to remember
There is no ideal repayment term, the goal being to find affordable monthly payments at the best rate. It is better to find the best credit in five years rather than choosing one in 48 months (4 years) while having difficulty paying your bills.
Also, consider the possibility of repaying – partially or fully – in advance your credit.