How The Term of a Loan Affects The Interest You Pay

When you take out a loan there are a few factors the lender uses to make a decision as to if they will grant the loan or not. Two of the largest factors are affordability, and also your credit score.

Affordability is usually the main factor looked at first when underwriting a loan, with credit history and credit score right next to it.

Once these two factors are reviewed and if you meet the tests of affordability, and your credit score is within the guidelines used by that lender for the type of loan you are requesting, usually everything else falls into place.

Then there are a few things you need to be aware of and are used in granting a loan:

* The loan amount

* The interest rate or APR/annual percentage rate

* The term of the loan, how long are you paying the loan back, the number of monthly payments

These factors will determine how much you repay in total for the loan.

Common sense states that a higher interest rate means you will pay back more in total, and a lower interest rate means you will be repaying back less.

And interest rates you may receive on a loan can be based on credit scores. Those with high or good credit scores can receive lower interest rates.

A borrower with a low credit score or bad credit, may get approved for a loan, but at a higher rate of interest.

Naturally higher interest rates can cause the monthly payments to be higher as well, so one way to reduce the monthly payments on a loan is to extend the term.

Loan Terms – Payments – Interest Paid

The longer the term is for a loan, can reduce the monthly payments.

A loan of £3000, at an interest rate of 3.5% for 12 months, the monthly payments will be £254.69, and you will be paying £56.28 in interest.

The same loan amount and interest rate for a term of 24 months, causes the monthly payments to be £129.54 and you will be paying £108.84 in interest.

Of course try to find a loan at 3.5%, the rates on personal loans are more like 9% or higher.

The same loan amount, £3000 at 9.9% for 24 months makes the monthly payments £137.71, and you are paying £305.09 in interest.

A longer term may help afford the monthly payments, but you also pay more in interest. Which is OK, as long as you are aware of this.

When you look at mortgage loans and terms, these numbers are much larger, due to the larger loan amounts, but also the terms now being offered for mortgages.

Property prices are high, so unless you have a large deposit, or buy a property under a low or no deposit scheme, your mortgage balance is going to be high.

Which means a high mortgage payment each month.

So lenders now are offering longer terms for mortgages. In the past 20 or 25 years seemed to be the usual term for a mortgage, however, today more and more lenders are offering 30 year and even 35 year mortgages.

In the United States, a 30 year mortgage was the standard for many years, but in recent times mortgage lenders there have been offering a 40 year mortgage.

40 years!

While this is good to aid in making the large loans more affordable, and allows payments to be reduced, the amount of interest being repaid is in the tens of thousands of pounds more than if you had a shorter term loan.

So while the term of a loan does affect the amount of interest you pay, in the example of such a large loan like a mortgage, which can be for hundreds of thousands of pounds, when you extend the term longer the interest paid can be much higher.

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You will then be asked to include the details of your guarantor and as mentioned above, this is usually someone who you know and trust and wants to help you with your personal finances. Ideally, a guarantor with good credit will maximise your chances of being approved based on the idea of ‘if someone with good credit trusts you, well we can too.'<strong>How Much Can I Borrow From Guarantor Loans?</strong>Guarantor Loans gives applicants the chance to borrow £500 to £15,000 depending on the lender. Some lenders we feature like Buddy Loans only have a maximum loan value of £7,500 and TFS Loans is the only lender that stretches up to £15,000.Factors that can influence the amount you can borrow revolve around having a good guarantor. One that is a homeowner, with solid employment, income and good credit rating will maximise your chances of borrowing the largest drawdown possible.The lenders featured on Guarantor Loans see a homeowner as someone who has already gone through the rigorous process of credit checking and affordability and if they can afford a house, they should be able to act as a guarantor for you.By comparison, having a guarantor that is not a homeowner offers slightly less security and means that amount you can borrow is slightly less too.Higher amounts may be available to those who already have a better than average credit rating, are homeowners themselves and a repeat customer with the lender who has already paid their loan on time. To apply directly with your lender of choice see <a href=”” data-mce-href=””>direct lenders</a>.<strong>What Does The Guarantor Have To Do?</strong>Upon completing an application, the lender will typically send you a <a href=”” data-mce-href=””>pre-contract loan agreement</a> and SECCI (Standard European Consumer Credit Information form) which will highlight the terms of your loan. You and your guarantor will be required to review the terms of the loan, including the loan drawdown, fees, repayment dates and responsibilities – and this can be signed via an online verification process using your email and mobile phone.The lender will usually carry out an individual phone call with you and your guarantor to ensure that you both understand the responsibilities and what is required of you – notably that if you cannot make repayment, your guarantor will be required to pay on your behalf. Further to some additional credit and affordability checks, funds can typically be transferred within 24 to 48 hours (or sometimes on the same day).<strong>Are Guarantor Loans Available For Bad Credit Customers?</strong>Yes, even if you have a history of adverse credit, <a href=”” data-mce-href=””>CCJs</a>, bankruptcy or IVAs several years ago, you can still be eligible. The idea is that you are using your guarantor and their financial history to ‘back you up’ and give your loan extra security. However, it is noted that your guarantor should have a good credit score and consent to co-signing your loan agreement.<strong>How Soon Can I Receive Funds?</strong>Guarantor Loans works with lenders that can facilitate funds within 24 to 48 hours of approval, or sometimes on the same day.When your funds are successfully transferred, most lenders working with Guarantor Loans will send the full amount to the guarantor’s debit account first. This is a standard security measure carried out by lenders to ensure that the funds are going to the right person and confirms the involvement of the guarantor. The guarantor usually has a ‘two week cooling off period’ where they can decide to pass on the money to the main borrower or they can change their mind and return the funds with no extra charges.