How Different Loan Terms Affect Your Repayments

When taking out a personal or car loan, you’ll often see loans that last for very different periods.
Last modified: 15th May 2024
William Jolly  |  

That period of time, aka the loan term, can be one of the most crucial aspects of finding an affordable loan with repayments you can manage.

This article will explain in detail how the length of your loan can impact your repayments and how much you end up paying overall.

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What is a loan term?

A loan term is the length of time a borrower is required to repay the loan amount they borrowed (the principal) plus accrued interest. This loan term is specified in a loan contract before you receive the funds and will be used to formulate the loan’s minimum required repayments.

Loan terms are usually measured in either months or years.

What’s the average loan term in Australia?

There isn’t any specific data on the average loan term across personal and car loans in Australia, as loan terms can vary based on numerous factors, such as:

  • The lender
  • The purpose of the loan (e.g., travel, car, renovation)
  • The amount borrowed
  • The borrower’s credit score and financial history

And more. However, the typical personal or car loan term is generally anywhere from one to seven years. 

What’s the longest loan term in Australia?

Loan terms can be longer than seven years. According to Mozo’s research, at least four personal loans in its database offered 10-year loan terms as of 2022.

Depending on the factors listed above, getting one even longer than that may be possible.

What loan terms does Jacaranda Finance offer?

Jacaranda offers two loan products with varying loan terms:

How do different loan terms affect your loan repayments?

The loan term is one of the most significant influences on the size of your loan repayments. Generally, the longer the loan term, the more you pay overall, but your ongoing repayments will be smaller.

How does that work? 

Essentially, by borrowing over a more extended period, you’re stretching out the amount of time you’re being charged interest and fees on a loan. This will result in each ongoing repayment being smaller as there are now more repayments to make, but you’re adding a little bit more in extra costs each time.

We’ll show how this works below in greater detail.

What else can affect your loan repayments?

Loan terms are just one of the factors affecting how much you pay overall. Other key factors on loan repayments include the following.

Loan size

It’s simple: the more you borrow, the more you pay in interest, fees and other charges. The smallest loan size you can borrow is generally $2,001, according to ASIC (anything smaller is considered a short-term loan). 

Conversely, some loans could let you borrow well in excess of $100,000. It all comes down to circumstance.

Interest rate

A larger interest rate will result in higher interest charges on the outstanding loan balance, increasing the size of your repayments.

Fees

Personal and car loans often come with a range of additional charges, such as establishment fees, ongoing (monthly) fees, risk fees, missed payment fees and more. Depending on the lender, these fees can be added to your total loan balance at the start or to your ongoing repayments.

Your repayment frequency

While this will generally only make a small difference, how often you repay your loan can change your repayments slightly. 

It’s common for lenders to offer several different repayment frequencies: weekly, fortnightly and monthly. Since there are 12 months in a year but 26 fortnights and 52 weeks, you essentially make an extra month’s worth of repayments by choosing the latter two.

You should be able to change how often you make your repayments by contacting your lender or doing it online. With Jacaranda Finance, you can also request to change your loan repayment frequency within our FastMoney mobile app.

Download the FastMoney App now!

Extra repayments

Making additional payments on top of your minimum required payments can reduce the loan's life and the total interest paid. 

You can make extra payments into your loan as a regular payment or a one-off lump sum. While there might be a fee for doing so depending on the lender (or for paying off your entire loan before your loan term finishes), making extra repayments is usually a financially prudent long-term option.

Other loan features

Features, like offset accounts or redraw facilities, can also affect your repayment amount if your lender offers them.

Read more:

Different loan terms & repayments: Worked examples

The following examples show just how much of a difference the loan term can make to otherwise identical loans. In this instance, you decide to borrow $10,000 with an interest rate of 10% p.a.

Loan term

Monthly repayments

Total repayments

12 months

$879

$10,550

24 months

$461

$11,075

36 months

$323

$11,616

60 months

$212

$12,748

Source: ASIC MoneySmart's personal loan calculator. Assumes no monthly fees and fixed interest rates for the duration of the loan.

As you can see, paying off this $10,000 loan over one year instead of five would cost you over $600 more for each monthly repayment. But overall, you’ve paid more than $2,000 less.

Ultimately, it’s about finding the right balance between the two based on what you’re comfortable paying.

Calculate your repayments with Jacaranda

Want to see how much your repayments might be with one of our loans? You can use the Jacaranda Finance Loan Repayment Calculator to estimate what you might pay based on:

The pros and cons of short vs. long loan terms

Here’s a summary of the advantages and disadvantages of both short and long loan terms.

Long loan terms: Pros and cons

Pros

Cons

  • Lower monthly repayments
  • Better for budgeting and managing other financial commitments
  • More likely to offer higher loan amounts
  • Can still be paid off faster via extra repayments
  • More interest paid over the life of the loan
  • Longer financial commitment
  • Potential for negative equity if the asset (e.g., a car) depreciates faster than the loan is repaid

Short loan terms: Pros and cons

Pros

Cons

  • Less interest paid over the life of the loan
  • You can pay off the loan faster
  • Quicker path to full ownership of an asset, like a car loan
  • Higher ongoing repayments
  • Less flexibility in monthly budgeting
  • Greater chance of missing repayments due to their size
  • Less likely to offer higher loan amounts

How to choose the right loan term for you

There’s no right or wrong answer regarding how long a loan should be, as it’ll always come down to your specific needs. When choosing a loan term, consider your monthly budget, the total interest cost, your financial goals, and any potential future changes in your financial situation.

A shorter personal loan might result in higher ongoing repayments, but you’ll pay a lot less in the long run, so such a loan might be better for you if you’re in a more comfortable financial situation in the present.

For a longer-term loan, the smaller and more manageable ongoing repayments might be preferable to you if you don’t mind paying a bit extra overall. And remember, most loans let you make extra repayments if you wish, so you could always do that if you come into some money later.

Ultimately, it’s about finding the right balance between the two based on what you’re comfortable paying. If you’re unsure, consulting with a financial advisor or export might be beneficial to help make an informed decision.

Don’t forget everything else

Remember that the loan term isn’t everything when picking the right option for you. You still need to consider other equally essential loan factors like:

And more. Take the time to compare your options among multiple lenders to find the best loan you can for your needs.

Try a Personal Loan with Jacaranda Finance

At Jacaranda, we offer several different loan products with various terms: our Car Loans can be repaid over as little as 25 months, while our Personal Loans can last for up to 48 months.

Check if you qualify for one of our loans today without impacting your credit score!

Written by - William Jolly

Content Manager
William is the Content Manager at Jacaranda Finance. He has worked as both a journalist and a media advisor at some of Australia's biggest financial comparison sites such as Canstar, Compare the Market and Savings.com.au, and is passionate about helping Australians find the right money solution for them.

You can get in touch with William via williamj@jacarandafinance.com.au.
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