Find your total payments: How do loan terms affect the cost of credit?

What you’ll learn ✅

• What loan terms are

• How interest rates, repayment timelines, and loan amount affect the total cost of borrowing

• How loan terms impact your monthly payments

Loan terms are the conditions you agree to follow when you take out a mortgage. The two most impactful factors are the interest rate and the loan’s duration. These elements directly influence your monthly payments, planned budget, and house affordability.

In this guide, learn how loan terms affect the cost of credit and why these components change your total cost.

What are loan terms?

Loan term has two slightly different but closely related meanings. In many cases, it refers to how long the repayment period is, such as 20 or 30 years. But it can also mean the conditions and restrictions associated with the loan. This includes the repayment period, as well as:

• The interest rate and type (fixed, variable, or adjustable)

• Payment frequency and due dates

• Fees and penalties

• Collateral requirements

In this article, we’ll keep things clear by using “loan term” to describe the conditions and “repayment period” or “loan duration” in reference to the duration.

How interest rates impact cost of credit

Borrowing money isn’t free. When people access financing, they need to pay the cost of credit. This is primarily accrued through interest, though several factors influence that rate.

Lenders typically quote interest as an annual percentage rate (APR), which includes both the base interest rate and any additional costs, including fees like mortgage insurance and closing costs. It’s the yearly cost of borrowing expressed as a percentage. For example, if your APR is 7%, you can expect to pay roughly 7% of your outstanding loan balance in interest each year.

There are three main types of interest rates:

• Fixed: Fixed interest rates stay the same throughout the life of the loan. Payments are predictable, and the lender establishes the total amount of interest in advance.

• Variable: Variable interest rates go up and down depending on market conditions.

• Adjustable: Adjustable-rate mortgages start out with a fixed rate, then shift into a variable rate once the fixed-rate period ends.

But what factors determine interest rates in the first place? The primary contributors are your credit score, income, loan amount, and repayment window. Generally, the better your financial profile, the more favorable the interest rate. And the bigger your loan amount or the longer the loan duration, the higher the interest rate. 

With a rate in place, the loan duration decides the cost of credit in total interest. A long-term loan means you’ll pay more. That’s because you’re paying interest every year over a longer timespan. 

How do loan terms affect monthly payments?

Beyond the cost of borrowing, the loan amount, repayment period, and interest rate also determine your monthly payments.

The higher the loan amount and interest rate, the higher the monthly payments. Because you’re borrowing more money and racking up more interest, you’ll need to pay more per installment.

Now let’s factor in the loan duration. With a longer-term option, you’re spreading out your payments over a longer horizon, which shrinks monthly payments but grows total interest paid. With a shorter repayment timeline, you’re paying off the loan faster, which means monthly payments are higher, but total interest goes down.

Suppose you’re looking to spend about $500,000 on a new home and can afford a 20% down payment (or $100,000). That means you have $400,000 left to finance. You secure a fixed 7% interest rate but have to choose between a 20 or 30-year repayment window.

At 30 years, your monthly payments would amount to about $2,661 a month before property taxes and other costs of homeownership. At 20 years, your monthly payments increase to about $3,101.

Further, the effect on total interest is dramatic. With the 30-year option, you’ll pay a little over $558,000. If you choose 20 years, the amount plummets to $344,000.

Think of it like gassing up a car. If you’re driving a long distance, you might use a significant amount of standard fuel — not too pricey in the short term, but it adds up over time. However, for a quick race, you might use expensive, high-performance fuel, but you won’t need as much of it, so the cost will be lower.

Repayment periods by loan type

Typical repayment timelines vary by loan type. Here are the most common.

Mortgages

Mortgages are usually long-term loans. Different types have distinct repayment periods, but most are 30 years. However, unique situations determine how long home loans are — you’ll also find 10, 15, and 20-year loans. Shorter timelines than these are rare.

Better offers 10, 20, and 30-year loans for ultimate flexibility. We offer fully transparent rates and terms — no hidden fees and nothing buried in the fine print. Get pre-approved in as little as three minutes to lock in your ideal mortgage.

...in as little as 3 minutes – no credit impact

Auto loans

Lenders commonly offer auto loans in 12 month increments, usually starting at 24 months with plans up to 84. However, some providers go as low as 12 months or as long as 96.

Personal loans

Personal loan repayment timelines often range from two to seven years, with some lenders going as low as one. These can also extend to 10 years and beyond, particularly for home improvement loans.

Understanding loan terms: Why it matters to borrowers

Learning how loan terms work empowers you to:

• Shop around with confidence: You’ll find the offer that actually aligns with your situation, not one that initially looks good on paper but isn’t beneficial in practice.

• Get a bargain: You’ll negotiate the right conditions and bring the cost of credit down as much as possible. For example, if you can afford it, understanding terms lets you secure a short-term loan with lower interest over time.

• Avoid surprises during repayment: You won’t get tripped up by monthly costs and interest charges. Learning how each factor impacts your bills lets you budget confidently.

Compare rates, and secure Better terms

You can’t shop around for a mortgage effectively if you don’t know what to look for. Understanding loan terms, month-by-month payments, and repayment windows gives you the tools to compare offers and find the best mortgage for you. To find and lock in high-quality rates faster, reach out to Better.

Better lets you start your mortgage hunt fast. Get pre-approved in as little as three minutes, and let Betsy, our AI, evaluate 21,600 loan scenarios to find your best rate¹ from our convenient, digital platform. Access 24/7 customer support, ask targeted questions, and maintain clarity from start to finish.

Design personalized loan terms to fit your budget with Better.

...in as little as 3 minutes – no credit impact

FAQ

How much does a loan affect your credit score?

The effect of a new loan account on your credit score depends on the terms, your existing debt burden, and your payment history. For example, typical credit score dips after closing on a mortgage range from 13.5 points to 28 points, with an average of 20.4 points. This is a modest impact, and scores recover in 339 days on average.

Does the loan term affect the interest rate?

Yes, lenders typically offer lower interest rates for shorter-term loans and raise them for longer-term ones. That’s because longer-term loans are riskier for the lender, since there’s more time for the market to decline or the borrower’s financial situation to change.

What‘s a term loan?

A term loan is any type of loan that provides a lump sum of funds up front. Borrowers then repay this amount in regular installments over a set time period. A classic example is a mortgage.

Can I change my loan terms after signing?

In most cases, you can’t directly modify your terms after signing the agreement. You can, however, change them by replacing your loan with another one. This is called mortgage refinancing.

For example, suppose you have a $500,000 mortgage and have already paid down $100,000. You improved your credit since you took out your initial mortgage, and you think you can score a better interest rate with a different lender. By taking out a new $400,000 mortgage, you can pay off the existing mortgage and start over with a brand-new set of terms.

If you’re looking to secure a new mortgage with more favorable terms, check out Better’s refinancing options. See how much you could save with our free refinance calculator, then lock in a competitive interest rate and improve your current monthly payments.

¹Disclaimer: Betsy evaluates loan scenarios using currently available data across participating investors, product types, loan terms, and rate assumptions. The stated number of scenarios reflects a mathematical combination of these inputs (including multiple investors, product categories, loan terms, and rate variations) and does not represent a guarantee that all scenarios are available to every borrower or that any specific rate or loan will be offered. Actual loan options, rates, and terms depend on individual borrower qualifications, credit profile, property characteristics, loan amount, market conditions, and lender requirements at the time of application.