Loans are valuable tools for many situations in life. When used responsibly, they can allow you to afford items you'd struggle to save enough money to purchase on your own. At the same time, the actual costs of loans aren't always upfront and easy to see.

The better you understand the process, the wiser choices you can make about your money, and how much these convenience loans offer affects your final price. These are a few key things you need to understand about how the length of a loan impacts the total amount you'll pay for the items you purchase using loans.

How Loan Terms are Structured

The term "loan structure" is difficult to succinctly define. This difficulty arises because different lenders use different elements to determine loan structure. Some will even use other factors for different types of loans. Common factors that affect loan structuring include:

• Loan amount
• Interest rates
• Length of loan
• Collateral
• Type of loan
• Purpose of loan
• Risk and mitigation
• Frequency of payments

Changing any of the elements above can significantly affect the total amount you'll pay for your loan. However, few of these elements have the same impacts on the overall loan costs as the loan's length and the loan interest rate. That doesn't mean that each of the above elements isn't important to consider carefully.

The Relationship Between Loan Length and Interest

Home loans are excellent illustrations of the relationship between loan length and interest. Home loans are available for various terms or durations. The most common mortgages are for 30 months, though securing a mortgage for 10, 15, or even 20 years is possible.

Let's consider that median home prices in the U.S. generally range from $300,000 to $400,000, although some states are outliers in these averages. Here's where things get interesting. Remember the factors or elements discussed previously when structuring loans; the interest rate for a 30-year mortgage is typically higher than that for a 15-year mortgage. Not only is the interest rate lower from the beginning, but you also pay for a shorter amount of time.

Comparison of Loan Lengths and Costs

Here's where you can see these differences in action. Consider interest rates for 30-year fixed-rate mortgages are at 7%, and rates for 15-year fixed-rate mortgages are at 6%. It doesn't sound like that big of a difference. And yet, when you calculate it out over the life of the loan, it makes a monumental difference in the amount you will ultimately pay to purchase your home. Here's the difference.

The monthly difference may be more painful in the short term but will ultimately save you $306,650 for your loan. That means that by paying an extra $625 per month, you can save hundreds of thousands of dollars on your home. The difference is enormous!

Even if the interest rates for the different term options are the same at 6%, you'll pay $755,432 for the 30-year loan and $531,630 for the 15-year loan, a $223,802 difference.

Short Vs. Long-Term Loans Pros and Cons

At first glance, the lower monthly payments afforded by the 30-year mortgage are more appealing to many cash-strapped families. In fact, many home buyers view this as an opportunity to buy a large home for their money. However, the long-term costs are staggering once you do the math.

Many families seek lower monthly costs upfront with the idea that 10 or 15 years from now, they can make catch-up payments and save some money on the back end of the mortgage. However, the bulk of your interest payments is paid upfront, which means that you will save the most money by making extra payments at the beginning of the loan rather than later when you're mostly paying toward the principal.

The bottom line is that shorter loan terms mean higher monthly payments but more significant savings on interest costs. However, don't discount the most considerable benefit of a shorter loan term. It means you will have completely paid for your loan in a shorter time, savings piles of money that would go towards interest payments and freeing up your budget for future purchases.

Choosing the Right Loan Term

When exploring your options, you must make the right choice for your needs. The proper loan term for you may be the one that gives you a forever home now, while choosing a shorter period may allow you to get more bang for your buck when you buy your next home.

Managing a Loan Over Time

Managing a loan over time, whether handling it for 10, 15, 20, or even 30 years, requires commitment and dedication. Make your monthly payments your first priority, and then seek other ways to maximize your investments by reducing interest costs, increasing your credit score, and maintaining a solid credit utilization score.