In a short term vs long term loan comparison, a shorter term usually means higher repayments but less interest overall, while a longer term lowers each repayment but usually costs more in total. The right term is one whose repayments you can comfortably afford alongside your other bills, with a buffer if your rate is variable.
This guide shows how a $20,000 loan changes over 2, 3, 5 and 7 years, what else affects the total cost, and what to check before you choose a term for a personal or car loan.
Short and long loan terms at a glance
The loan term is how long you have to repay the loan. This table sums up the trade-off when the rate and fees stay the same.
Factor | Shorter term compared with a longer term |
|---|---|
Each repayment | Higher, because the amount is spread over fewer repayments |
Total interest | Usually less, because interest is charged for less time |
Time in debt | Shorter |
Monthly budget | Less room each month, while a longer term gives more room for longer |
Rate, fees and features | Not set by the term alone, so compare each lender's offer and contract |
Source: Moneysmart, October 2026.
The term is only one part of the cost. The rate, the fees and the loan's features can change the total as much as the number of years.
How the term changes repayments and total cost
Personal loans and car loans are usually repaid over one to seven years. A shorter term spreads the amount you borrow over fewer repayments, so each one is larger, but interest is charged for less time.
Moneysmart puts it simply: shorter terms can mean less interest overall, while longer terms may lower your repayments but increase the total cost. That's why the size of the repayment and the total you repay need to be read together.
A lower repayment can feel like the cheaper loan, but it often isn't. The extra months of interest are easy to miss when you only look at what leaves your account each month.
Worked example: $20,000 over 2 to 7 years
To show the trade-off, here is the same loan over four terms. The figures use these assumptions:
- $20,000 borrowed at a fixed illustrative rate of 10% a year, the same for every term
- interest compounding monthly, with monthly principal-and-interest repayments
- no fees, no balloon payment and no early repayment
- not a Loans123 rate or offer, since real rates and fees differ by lender and borrower
Term | Monthly repayment and total repaid |
|---|---|
2 years | $922.90 a month, about $22,150 in total |
3 years | $645.34 a month, about $23,232 in total |
5 years | $424.94 a month, about $25,496 in total |
7 years | $332.02 a month, about $27,890 in total |
Source: Loans123 calculation, October 2026. Illustrative only, using the assumptions above.
Stretching the loan from 2 years to 7 cuts the repayment by $590.88 a month, but you repay about $5,741 more in total. Moving from 3 years to 5 lowers the repayment by $220.40 and adds about $2,264.
Repayments are shown to the cent and totals to the nearest dollar. The last repayment is adjusted by a few cents to clear the balance exactly, so each total differs slightly from the monthly repayment multiplied by the number of months.
Moneysmart's personal loan calculator shows the total repaid and lets you add fees. To try your own amount, rate and term, you can also use the Loans123 loan calculator.
What else changes the total cost
Two loans with the same term can cost very different amounts. These are the parts of an offer to compare alongside the number of years.
Fees and the comparison rate
Fees add to the total, including establishment, ongoing, missed payment and early repayment fees. The comparison rate combines the interest rate and most fees into one figure, so it's a useful guide when you compare offers.
It is worked out for a specified example, though, so it may not match your loan amount and term or capture every cost. ASIC notes that it leaves out some charges, such as those that apply only if you pay the loan off early, so read the fee schedule as well.
Fixed or variable rate
With a fixed rate, your scheduled repayments stay the same for the fixed period set out in your contract. With a variable rate, repayments can go up or down as rates change.
A variable rate often gives more flexibility to make extra repayments or pay the loan out early. The trade-off is less certainty about what each repayment will be.
Paying a loan off early
Extra repayments can cut the total interest and help you finish the loan sooner. Before you plan on them, check the contract for early repayment fees or limits, which fixed-rate loans in particular may charge.
A longer term with free extra repayments can work differently from a short term with fixed repayments. If you choose the longer term, it's your extra payments that bring the cost down, not the term itself.
Balloon payments on car loans
Some car loans let you leave a lump sum, called a balloon payment, owing at the end of the term. This lowers the regular repayments without changing the number of years.
Moneysmart's car loan guide warns that you repay the lump sum with interest, so the total cost of the loan is generally higher. Our guide to car loan interest rates shows a worked balloon example on a $40,000 loan.
Can you afford the repayments?
A term only works if you can keep up every repayment alongside rent or a mortgage, bills and other debts. A budget that lists your money in and money out shows how much room you really have.
On a variable rate, check whether you could still afford the repayments if the rate rose by 2% or 3%. On a fixed rate, the scheduled repayments may stay stable under the contract, but fees and other household costs can still change.
The rate a lender offers depends on more than the term. Lenders may look at your credit score, income, expenses and savings, so the rate you get can differ from the one advertised.
The risk of stretching a loan
Choosing the longest term to get the lowest repayment can mean paying for the loan for years longer than you need to. The extra interest builds up quietly, especially on larger loans.
The same applies when you refinance or consolidate onto a longer term. In Moneysmart's example, a $20,000 debt costs about $25,496 in total at 10% over 5 years, but about $29,119 at 8% over 10 years and about $30,379 at 6% over 15 years.
A lower rate over a longer term can still cost more, so compare the total repaid before you switch. Our guide to what consolidation loans really cost covers this in more detail.
If you find yourself refinancing again and again just to lower the repayments, that can become a cycle of repeated borrowing. Our guide to common debt traps explains the warning signs.
Which term suits which situation
There's no single term that suits everyone. This table shows what to check in some common situations, rather than which term to pick.
Your situation | What to check |
|---|---|
You can comfortably afford higher repayments | Whether a shorter term lowers the total repaid once the lender's fees are included |
Your budget is tight each month | How much more a longer term costs in total, and whether you can make extra repayments without a fee |
You're on a variable rate | Whether you could still afford the repayments if the rate rose by 2% or 3% |
You might sell the car or repay early | Early repayment fees in the contract, and any balloon payment |
You're consolidating debts | Whether the new term is longer than the debts you're replacing, and the total cost |
Source: Moneysmart, October 2026.
If repayments become hard
If you're struggling to keep up, contact your lender's hardship team early. Lenders must consider a request for hardship help and assess what help is available.
The free National Debt Helpline is on 1800 007 007 (weekdays 9:30am to 4:30pm), or you can use its live chat (weekdays 9am to 8pm). Our guide to getting out of debt covers the next steps.
Frequently asked questions
What is a loan term?
It's the length of time you have to repay a loan, set out in your contract. Personal and car loans are usually repaid over one to seven years.
Is a shorter loan term always cheaper?
At the same rate, a shorter term usually costs less interest, but fees and early repayment charges also affect the total. Compare the total repaid on each offer, not only the repayment.
Can I pay off a longer loan early?
Many loans allow extra repayments, which can cut the total interest. Fixed-rate loans may charge an early repayment fee, so check your contract first.
Should I choose a longer term to lower my repayments?
A longer term can make repayments easier to manage, but you'll usually pay more in total. It helps to choose a term only as long as your budget needs.
Does a balloon payment change the loan term?
No, a balloon keeps the term but lowers the regular repayments by leaving a lump sum at the end. You repay that lump sum with interest, so the total cost is generally higher.
Comparing loan terms with a broker
When you compare loans, ask for the total repaid on the same amount and term, alongside the comparison rate and fees. Loans123 compares 30+ lenders, and our page on personal loans in Perth explains the options.
This article is general information only and does not take your personal circumstances into account. It is not financial advice. Consider whether a product suits you and read the loan terms before you apply.
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Written by
Trent Cray
Finance Specialist, Loans 123
Trent is a Finance Specialist at Loans 123 in Victoria Park, Perth. He helps customers compare more than 30 lenders to find car, personal and business finance that suits their situation.
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