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Understanding Loan Term Lengths
Choosing the right loan term can significantly impact your monthly payments and the total cost of your loan. At O1ne Mortgage, we are here to help you navigate these decisions. Call us at 213-732-3074 for personalized mortgage services.
What Is a Loan Term Length?
A loan term is the duration over which you will repay your loan. The term length varies based on the type and size of the loan. For instance, mortgage terms typically range from 10 to 30 years, while auto loans can span from 24 to 84 months. Personal loans usually have terms between 12 and 60 months.
How to Choose the Best Loan Term Length
The ideal loan term balances an affordable monthly payment with the shortest term and lowest overall cost. Consider these factors:
- Longer terms mean smaller monthly payments but higher interest rates.
- Shorter terms usually have lower total costs due to less interest paid over time.
Mortgage Payments: 30 Years vs. 15 Years
For example, a 30-year mortgage will have lower monthly payments compared to a 15-year mortgage, but the total cost will be higher. Using April 2023 mortgage rates, a $400,000 home purchase with 20% down results in:
| Loan Term | APR | Monthly Payment | Total Cost |
|---|---|---|---|
| 15 Years | 5.347% | $2,589 | $465,977 |
| 30 Years | 5.978% | $1,914 | $689,054 |
While a 30-year mortgage saves you $675 monthly, it costs an additional $223,077 over the loan’s life.
Minding the Equity on a Car Loan
Longer car loan terms can make monthly payments more manageable but increase total costs. For instance, a $30,000 car loan at 5.6% interest over five years has a monthly payment of $574. Extending the term to seven years reduces the payment to $433 but increases total payments by $1,867.
When to Choose a Shorter-Term Loan
Opt for a shorter-term loan if you:
- Can afford higher monthly payments.
- Secure a lower interest rate.
- Want to pay off the loan faster.
- Seek the lowest total cost.
When to Choose a Longer-Term Loan
A longer-term loan may be suitable if you:
- Need lower monthly payments.
- Can handle a higher interest rate.
- Are willing to pay off the loan over a longer period.
- Accept a higher total cost for lower payments.
The Bottom Line
Adjusting your loan amount can also help manage costs and payments. Opting for a less expensive home or car, or a smaller personal loan, can reduce both your total costs and monthly payments. Good credit is crucial, as it influences the interest rate you receive. Check your credit score and report for free with Experian to ensure you get the best loan terms possible.
For expert guidance on choosing the right loan term, contact O1ne Mortgage at 213-732-3074. We’re here to help you make the best financial decisions.
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