The Advantages of Shorter Loan Terms: Why Would a Borrower Want to Pay off Debt Faster?

Depending on the type of loan and the lender’s policies, loan periods might range from a few months to decades. Longer durations are frequently chosen by borrowers in an effort to lower their monthly payments, but sometimes shorter terms are preferable. Here are a few explanations as to why a borrower could want a loan with a shorter duration.

1. Reduce Interest Expenses The borrower will eventually pay more interest the longer the loan period is. Even on high-interest loans like credit cards or personal loans, shorter terms can save consumers thousands of dollars in interest costs. For instance, a $10,000 loan with a 5% interest rate paid back over five years would total $11,322, as opposed to $10,617 for a loan paid back over three years.

2. Increase Equity Borrowers may be able to accumulate equity more quickly with shorter periods. This is especially true for mortgages, as each payment increases the borrower’s equity in the home. A borrower will acquire full ownership of the property earlier and can begin accumulating wealth through appreciation or rental income with a shorter mortgage term.

Reduced default risk for the borrower is another benefit of shorter durations. Longer terms can make it challenging to make payments due to unforeseen life events like illness or job loss. A shorter term reduces the chance of default and the amount of time for these events to occur.

Which Credit Report Is Most Reliable? Experian, TransUnion, and Equifax are the three largest credit reporting companies in the country. It is typical for credit ratings to change between agencies because each one calculates credit scores using slightly different methodologies. To assess creditworthiness, all three agencies use the same fundamental data, such as payment history, credit use, and length of credit history.

The range of credit scores is 300–850, with higher scores indicating more creditworthiness. A score below 600 is typically seen as poor, and it could be challenging to be approved for loans or credit cards. Scores between 600 and 700 are acceptable, although borrowers may be subject to tougher conditions or higher credit rates. Borrowers who have scores of 700 or higher may be eligible for better rates and terms.

Anything above a 700 would be considered a high credit score. In general, a score of at least 700 is good, and a score of at least 750 is exceptional. It’s usually advisable to verify with the lender directly because different lenders may have different criteria for what constitutes a good credit score. A bigger credit limit, better conditions, and lower interest rates may be available to borrowers with superior credit scores.