Why a Personal Loan With a Longer Repayment Term Could Be a Better Choice

Your choice of loan terms will impact your finances, so be sure to find the right fit for you.

If you're taking out a personal loan, you'll have to make some big decisions. One of the most important is how long your loan repayment term should be.

In many cases, opting for a shorter payoff period makes your loan cheaper -- but there are times when you may want to consider a longer repayment timeline. Here's why taking more time to pay off your loan could sometimes be the better financial choice.

When does it make sense to take a personal loan with a longer payoff schedule?

Taking a personal loan with a longer repayment term is the best choice in situations where you need your monthly payments to be lower. See, when you cut down the time it will take to repay your debt, you save money in the long run. But the price of this savings is that each monthly payment goes up -- sometimes substantially.

Here's an example of a five-year $10,000 loan:

Now, here's an example of a 10-year $10,000 loan:

In the first example, your estimated monthly payment would be $193 and your total interest over time would be $1,599.68. In the second example, your monthly payment would be just $116 -- but you'd end up with interest costs of $3,933.02 over time.

Now, in an ideal world, you'd want to take the loan that costs you less in interest. But that loan would also cost you about $77 more per month.

Sometimes, coming up with that extra $77 could be undesirable or even impossible. And if that's the case, you'd be better off opting for the loan with the longer payoff time even though it would cost you more in the end.

Here are a few scenarios when you might want that longer payoff timeline:

• You're worried you might default. If you think you might not be able to cover the higher payment or that paying it would make it hard to meet other financial goals, you might want to go for the lower monthly payment on your loan.
• You have other higher-interest debt. If you have credit cards or other debts at a much higher rate than the personal loan, then a longer payoff time with a lower monthly payment would typically make more sense. You'd be better off putting your extra money toward that costlier loan to get it paid down faster.

Find the right fit for you

It's important to remember that even if you do choose the loan with the longer payoff time, you always have the option to make larger payments when you can afford to. This could help you reduce the added interest cost you're taking on and make payoff cheaper -- as long as you make certain that you aren't going to be hit with prepayment penalties.

The key is that the longer payoff term could provide the flexibility you need if you must take out a personal loan and are worried that higher monthly payments could cause financial challenges.