Personal loans are more popular than ever, as evidenced by personal loan originations reaching record highs. In fact, total personal loan balances have increased 26% year over year.

If you’re thinking of joining the millions of borrowers using personal loans to consolidate debt or finance home improvements, you may be unsure what loan terms to look for when reviewing your options. Personal loan term lengths can significantly impact your monthly payment, interest rate, and overall repayment cost.

How long is a personal loan term?

A personal loan is a type of loan you can use for a variety of purposes, including debt consolidation, home renovations, travel, or even a dream wedding. These loans are typically unsecured, so there's no need for collateral to secure the loan.

Personal loans are installment loans, so you make monthly payments over the loan's term. Lenders can decide what loan terms they can offer, so terms vary by lender. Most lenders have terms between 24 and 60 months, though some do offer longer-term options, such as 72 or even 84 months. The longer terms are generally only available to borrowers with good to excellent credit.

How term length affects the terms and conditions of your personal loan

With most personal loan lenders, you can choose what loan term you want when applying. When choosing a term for your personal loan, it's important to understand how the loan term affects you:

Your monthly payment is dependent on it

Your personal loan payments depend on your loan amount, annual percentage rate (APR), and the loan's term. Generally, the longer the loan term, the lower your monthly payment. For example, below are your payments for a $10,000 loan at different terms. For the sake of the example, the loan options have the same rate.

As you can see, the highest payment is on the loan with the shortest term. Extending your loan term to 60 months can reduce your payment by hundreds each month, which could make the loan more affordable on your budget.

It affects what interest rate you qualify for

Your APR is one of the biggest factors affecting the cost of your loan. The APR — how much you'll pay in interest and fees over 12 months — is reflected as a percentage, such as 10.00%.

Several factors affect the APR on your loan, including your credit history, your desired loan amount, and how you intend to use the loan funds. However, your loan term can also impact your APR. In general, lenders charge higher rates on longer loan terms. For example, a lender may have rates as low as 11.79% on loans with 24-month terms, but rates may start at 13.79% for terms of 60 months or longer.

Although the shorter term can result in a lower payment, you could end up with a higher rate and pay more over time in interest.

It may change your borrowing minimum

Although lenders usually allow you to choose your loan term, some restrictions exist. With many lenders, longer loan term options have higher borrowing minimums than shorter terms. For example, a lender may have the following minimums:

To put that in perspective, consider this example: You want to borrow $5,000 to update your kitchen. A 60-month term would give you a more affordable monthly payment, but the lender requires a minimum of $10,000 for terms of that length. To get that term, you'd have to borrow double what you actually needed. Taking on unnecessary debt is risky, as many people will find the temptation to spend to be too difficult to ignore.

It impacts your overall repayment cost

Although a longer repayment term will give you a more affordable monthly payment, it comes at a cost: The longer term will cause you to pay significantly more in interest.

Going back to our example above, you can see how a loan term of 60 months gives you a much lower payment, but you'll pay thousands more in interest than if you opted for a loan term of 24 months. And keep in mind that the rates on all four loan options are the same for the sake of the comparison. But as mentioned earlier, longer terms tend to have higher rates, so you'd pay even more in interest charges.

The Federal Reserve Bank of Dallas has a loan calculator tool you can use to find out what your payments and overall repayment cost would be with different loan terms.

How long should my personal loan term be?

Now that you know how the personal loan term length affects your payments and repayment costs, you can decide which loan term is suitable for your needs. If you're not sure what term to pick, ask yourself the following questions:

• How much can I afford each month? Create a budget — deduct your fixed and variable expenses from your monthly take-home pay — to see how much money you have left over that can be dedicated to your loan payments. This exercise will help you determine how much you can afford in monthly installments.

• What is my priority with the loan? Before choosing a term, think about what you want to accomplish. If your goal is to save as much money as possible when consolidating debt, opting for the shortest term you can afford will give you the best result. But if you're borrowing money for a significant emergency expense — such as repairing a damaged roof — you may be okay with a longer term to get a lower payment.

• What other goals do I have? Taking out a personal loan will affect your ability to qualify for other forms of credit until it's paid in full. If you have plans to buy a new house or car in the next few years, you may want to choose a shorter term so you can pay it off before shopping for a new loan.

• How important is flexibility? When deciding which loan term is best for you, keep in mind that leading personal loan lenders don't charge prepayment penalties. Without a prepayment penalty, there's no added charge for paying off your loan ahead of schedule. As a result, you can pick a longer loan term to give you a more affordable monthly payment. But if you can afford to do so, you can make extra payments or pay off the loan ahead of schedule to save money. This strategy gives you more flexibility since you'll have a smaller payment if other unexpected expenses arise. Still, you can pay off the loan early to cut down on interest charges.