How term length can impact overall loan cost
The longer you take to pay off a loan, the more you will pay in interest, which can add significantly to the overall cost of the loan. Let's say you wanted to take out a $20,000 loan to buy a new car. Here is what might happen depending on whether you wanted to pay off the loan in 36 months, 48 months or 60 months:
| Loan amount | $20,000 | $20,000 | $20,000 |
|---|---|---|---|
| Loan term | 36 months | 48 months | 60 months |
| Interest rate | 7.0% | 7.0% | 7.0% |
| Monthly payment | $618 | $479 | $396 |
| Total interest paid | $2,230 | $2,988 | $3,762 |
| Total paid | $22,230 | $22,988 | $23,762 |
Although your monthly payments would be higher with the shorter-term loans, you'll end up spending far less in interest over the life of the loan.