Different types of lending have different terms and it is worth considering which will be the best for you. The term means how long you have to repay the loan. A mortgage is likely to be between twenty and thirty years and a payday loan a few weeks, so there can be a huge difference. Often the longer it takes to repay a loan, the more expensive it will be because the interest has been adding up for much longer.
Choosing the cheapest term is not always the best option though. You would not be able to repay a mortgage in a few weeks, for example! So you need to think practically about what you can afford. It can be best to calculate how much you can afford in repayments and then work from there. If you can afford a lot, then you may be able to repay the loan over a shorter term than if you cannot afford much. Of course, this will also depend on the amount that you are borrowing.
Some loans, such as a credit card, have a flexible term. These may seem the most convenient as you only have to pay back a small amount each month and can choose when you repay what you have borrowed. However, this is expensive and risky. The longer you hold a loan, the dearer it is and with no pressure to pay it back, you will end up having the loan for a very long time. It can almost be too easy to forget about it and just keep paying the interest month after month and end up paying a lot of money for the loan.
It is wise to think about the future as well when you are thinking about the term that you want. If you have a long term loan, then you may find that in the future it gets more difficult to pay. It could be that interest rates go up, your costs go up perhaps due to an expanding family or you may have less money to be able to afford it for some reason. However, the future may be better, perhaps interest rates may fall, your income may go up and your expenses may go down. It is all very unpredictable and so you need to make sure that you are prepared for anything that might happen in the future. Make sure that you feel confident that you will be able to make the repayments for the whole term of the loan.
As it is usually cheaper, it can be tempting to just g for a short term loan. However, you may find that it is much harder to come up with the money required to repay it. It is really important that you do make the necessary repayments on time. If you do not do this then there are likely to be fees and these could be very high. Some types of loans will charge per day that the repayment is not made and therefore the debt can soon increase massively. Although there is some UK government regulation on making sure that the debts do not go too high they can still increase well beyond a person’s means. It can therefore be sensible to take out a more expensive loan which has a longer term to make sure that you will be able to make the repayments.
There is a lot to think about and this is why many people use a financial advisor to help them. If you wanted the loan from your bank then they may have an advisor that could help you. If you were not sure where to borrow the money from then you could pay a financial advisor to help you. Not only would they be able to help you find the right loan type for you, they should be able to help you find the best specific loan so that you can find one the is the easiest to manage and the best price.
Therefore the term is a really important factor. It can have a huge effect on the price of a loan but also on how easy it is to repay. You need to ideally find a balance between the cost by making the term short, but also ensure that you can afford each payment, which may mean making it dearer. However, a missed payment will be very expensive and it is something which you will want to avoid if you can.