The term is one of the most important factors when hiring a loan: depending on this variable you will pay more or less money at maturity.
Choosing a term or another is something that will affect your personal accounts, and of course in the standard of living that you can take until its completion. What term should be chosen according to your needs?
I want to ask for a loan, what expiration term suits me?
When choosing the term for your loan, you have different options:
Shorter periods that allow you to settle the operation more diligently, at the cost of increasing the monthly fee that you will have to pay to the bank.
Lengthen the loan, so that you can repay it more comfortably. With this second option, this expense will be reduced every month through a more affordable fee, but interest will be generated for longer.
The importance of deadlines when applying for a loan
When requesting a loan, we must take into account the repayment terms, as they are directly linked to the amount demanded. Usually, the greater the amount, the higher the period for its return.
In the market, there are many options: from just a few months to about 15 years to speed up the operation. The term, amount and interest rate are the variables that define the fee you will pay every month.
In Spain, the most common is to use the French amortization system to establish the monthly payment we will pay. With this system, a constant installment is generated for each month, formed by the interest generated in that month plus the loan repayment part.
- C: fee to pay
- C0: Nominal loan amount
- i: Effective interest rate, which must correspond to the period considered (if the duration is established in months, the interest rate as well).
- n: Duration of the operation.
The fee we will pay each month already incorporates interest and amortization: capital amortization acts increasingly, while interest is amortized in a decreasing manner so that the fees remain constant.
We must bear in mind that time is the main variable in the accumulation of interests, so in a shorter time, lower interest rates will be paid.
In addition to the loan repayment terms, it is also advisable to take into account the term in which you will receive the approval and the requested capital, especially when the reason for your request is to face an unforeseen event. There are several platforms that, without being quick credits, offer a solution in less than 48 hours, which is a factor to consider.
For example, loans between individuals offered on the Good Lender platform are characterized by being processed 100% online and confirming the final approval of the loan in 48 hours. In this case, it can be requested from 6.08% APR, with a term of 24 to 72 months, and up to an amount of 10,000 dollars.
What is the way to pay less per month for your loan?
If you encounter the problem of not being able to meet the monthly installments of your loan, you can agree on a less demanding monthly installment, through an extension of the repayment terms.
In this way, at expiration, you will pay more money as a result of the extension of the contract. That is, it will help you get better at the end of the month in the short term but at the cost of facing a greater medium and long monetary effort.
Therefore, lengthening or not extending your loan installments is a personal decision that you will have to assess based on your economic capacity. To keep a good forecast of income and expenses, in addition to respecting the maximum level of recommended indebtedness, it is interesting to implement the 50/20/30 rule:
50% for your basic expenses (mortgage, rent, food, transportation …),
20% for savings,
30% for your personal expenses (leisure, expendable expenses).
Case study on different terms and installments of a loan
Next, we will see a couple of practical examples on different terms when applying for a loan, as well as the monthly and total fee that we would have to face in each case. We will use the simulator of the Bank of Spain.
Imagine that you have hired a personal credit line of 10,000 dollars, with an interest rate of 8%. If you want to close the operation quickly, in 24 months, for example, you would have a more demanding monthly fee of 452.27 dollars. The advantage of making this decision is that you will settle the debt faster. However, your monetary effort to solve it will be significantly higher. The total payable would be $ 10,854.55, of which $ 854.55 corresponds to the interest on the loan.
In the opposite direction, and taking the same example as a model, you can have a less expansive fee if you direct your request to 5 years. As a result of this strategy, the fee will fall to 202.76 dollars per month. That is, a difference of 249.51 dollars every month with respect to the previous example. However, you will have to pay it for a longer period of time, and your final disbursement will be higher: $ 12,165.92, of which $ 2,165.92 corresponds to interest.
You may also be interested in repaying the loan before time, and it is advisable to contract it with an entity that does not charge fees for this operation. Following the previous example, Good Lender offers a 0% commission, both total and partial. That is, at any time you can repay part or all of the loan for the real part you have left to pay and without any commission.