Choosing a loan term looks like a small box on an application form, but it is one of the biggest decisions you make about any loan. Stretch a loan out and the repayments shrink; shorten it and you pay far less interest overall. This guide explains how long term loans work in Australia, shows worked examples with the arithmetic done properly, and walks through the features and costs that decide what you really pay.
Key takeaways
- A longer term lowers each repayment but increases the total interest you pay, often by a large margin.
- On an illustrative $500,000 home loan at 6% p.a., choosing 30 years instead of 25 cuts the monthly repayment by about $224 but adds roughly $112,700 in interest.
- Compare loans using the comparison rate, which bundles most fees into a single percentage based on standardised loan amounts and terms.
- Extra repayments and an offset account can shorten a long loan dramatically without locking you into higher minimum repayments.
- Fixed-rate loans can carry break costs if you repay or refinance early; check the contract before you commit.
What counts as a long-term loan?
There is no legal definition of a "long-term loan". The phrase usually describes credit repaid over several years in regular instalments, as opposed to credit cards, buy now pay later or a 90-day trade account. What counts as "long" depends on the loan type.
Personal loans
Personal loans are commonly offered over one to seven years, secured or unsecured, for purposes such as consolidating debts, medical costs or home improvements. Because unsecured rates are usually well above home loan rates, the term has a big effect on total cost. Our Personal Loan Comparison page explains what to compare.
Car loans
Car loans are often written over three to seven years, sometimes with a balloon payment. A car loses value while you repay it, so on a long term you may owe more than it is worth, which matters if it is sold or written off. See also our Car & Equipment Finance Guidance.
Home loans
Home loans are the classic long-term loan in Australia, commonly written over 25 or 30 years. With large balances, small differences in term or rate become very large differences in total interest, whether you are buying in Hobart, Launceston or anywhere else in Tasmania.
Business term loans
Business term loans fund equipment, fit-outs, vehicles, property or a business purchase, with terms ranging from about a year for working capital to 15 years or more for commercial property. Match the term to the useful life of what you are funding; our guide to the types of business finance in Australia explains how.
How loan term changes your repayments and total interest
The basic trade-off
Most long-term loans are principal and interest: each repayment covers that month's interest and pays down part of the balance. Extending the term spreads the principal across more repayments, which lowers each one, but the balance stays higher for longer and interest accrues for more months. You gain cash flow today and pay for it with a larger total bill.
The repayment tells you whether a loan is affordable. The total interest tells you whether it is good value. Look at both.
Worked example: the same personal loan over different terms
Example: a $30,000 personal loan at an illustrative fixed rate of 9% p.a., repaid monthly, with fees ignored so the effect of the term is clear. Repayments use the standard amortisation formula.
| Term | Monthly repayment | Total repaid | Total interest |
|---|---|---|---|
| 2 years | $1,370.54 | $32,893.01 | $2,893.01 |
| 3 years | $953.99 | $34,343.71 | $4,343.71 |
| 5 years | $622.75 | $37,365.04 | $7,365.04 |
| 7 years | $482.67 | $40,544.48 | $10,544.48 |
Moving from a five-year to a seven-year term lowers the repayment by about $140 a month, but adds $3,179.44 in interest. Moving from five years to three years costs about $331 more each month and saves $3,021.33 in interest.
Worked example: a home loan over 20, 25 and 30 years
Example: a $500,000 home loan at an illustrative variable rate of 6% p.a., principal and interest, assuming the rate never changes (it will, which is why these figures are illustrative only).
| Term | Monthly repayment | Total repaid | Total interest |
|---|---|---|---|
| 20 years | $3,582.16 | $859,717.27 | $359,717.27 |
| 25 years | $3,221.51 | $966,452.10 | $466,452.10 |
| 30 years | $2,997.75 | $1,079,190.95 | $579,190.95 |
On the 30-year loan, more than half of the total repaid is interest. That does not make a 30-year term a bad choice, as it often keeps a loan affordable when money is tight. The point is to choose it deliberately and plan to pay it down faster when you can.
Car loans and the depreciation problem
Example: a $40,000 car loan at an illustrative 8% p.a. costs $1,253.45 a month over three years ($5,124.37 interest), $811.06 over five years ($8,663.35 interest) or $623.45 over seven years ($12,369.68 interest). On the seven-year option you are still paying when the car needs major servicing, and the balance may exceed its market value for longer.
Fixed vs variable rates on long-term loans
Over a 30-year home loan you will almost certainly see several rate cycles, so the choice is really about how much certainty you want over the next few years.
Fixed rates
A fixed rate locks in your rate and repayment for a set period, commonly one to five years on home loans and often the full term on personal loans. A home loan usually reverts to variable when the fixed period ends.
Variable rates
A variable rate moves with the lender's pricing, which is influenced by the Reserve Bank's cash rate and the lender's own funding costs. Variable loans usually offer more flexibility: unlimited extra repayments, offset accounts and redraw are more common, and there are no break costs if you repay early.
Split loans
Many lenders let you split a home loan into a fixed portion and a variable portion. This gives some repayment certainty while keeping flexibility on the variable part for extra repayments and an offset account.
Fixed rate advantages
- Predictable repayments for budgeting
- Protection if rates rise during the fixed period
- Useful when your budget has little room for increases
Fixed rate watch-outs
- Break costs if you repay, sell or refinance early
- Limits on extra repayments are common
- You miss out if rates fall during the fixed period
- Offset accounts are less often available
Comparison rates and fees
How comparison rates are standardised in Australia
Under the National Credit Code, when a lender advertises an interest rate for certain consumer loans it must also show a comparison rate. The comparison rate combines the interest rate with most upfront and ongoing fees into a single annual percentage. To make loans comparable, it is calculated on standardised examples: for personal loans, a $30,000 loan over five years; for home loans, a $150,000 loan over 25 years. That is why advertisements carry a warning that the comparison rate is true only for the example given and may not include all fees and charges.
If you borrow far more or less than the standard amount, or over a different term, the comparison rate may not reflect your actual cost, because fixed fees weigh more heavily on small loans and short terms. Use it as a first filter, then check the actual fees for your amount and term.
Worked example: how fees change the real rate
Example: take the $30,000, five-year personal loan from above at an illustrative 9% p.a. Add a $500 establishment fee and a $10 monthly account fee. The repayment including the fee becomes $632.75 a month, and the total cost of credit rises from $7,365.04 to $8,465.04. Expressed as a single rate that accounts for those fees, the cost is about 10.41% p.a., not 9%.
Fees to look for
- Establishment or application fees charged when the loan is set up.
- Ongoing fees: monthly service fees or annual package fees on home loans.
- Valuation and settlement fees on secured loans.
- Lenders Mortgage Insurance (LMI), usually above 80% of a property's value; it protects the lender, not you.
- Early repayment, break or discharge fees, covered in more detail below.
- Late payment fees, and any fees for redraw or switching rate type.
Moneysmart explains comparison rates in plain English, and our finance glossary covers any unfamiliar terms.
Extra repayments, offset accounts and redraw
To get the affordability of a long term with the lower cost of a short one, take the longer term and repay faster when you can.
Extra repayments
Any amount you pay above the minimum goes straight to the principal, which reduces the balance that interest is charged on. Over a long loan the effect compounds. Using the illustrative $500,000 loan at 6% over 30 years:
| Monthly payment | Time to repay | Total interest | Interest saved |
|---|---|---|---|
| Minimum $2,997.75 | 30 years | $579,190.95 | – |
| Minimum + $200 | 25 years 6 months | $476,046.06 | $103,144.89 |
| Minimum + $500 | 21 years | $379,689.68 | $199,501.27 |
An extra $200 a month saves more than $100,000 in this example and finishes the loan four and a half years early. Unlike choosing a shorter term upfront, extra repayments are voluntary: if your circumstances change, you can drop back to the minimum.
Offset accounts
An offset account is a transaction or savings account linked to your home loan. The balance in it is subtracted from the loan balance when interest is calculated, usually daily. Example: keeping $20,000 in an offset account for the life of the same $500,000 loan, while paying only the minimum repayment, cuts total interest to $489,156.34 and finishes the loan in 27 years and 6 months. That is a saving of $90,034.61, while the money stays available for emergencies. Offset accounts sometimes come with higher fees or rates, so check that the saving outweighs the cost.
Redraw
Redraw lets you withdraw extra repayments you have already made. Like an offset, the money reduces interest while it sits in the loan, but access can be less convenient, lenders can change redraw conditions, and minimums or fees may apply.
Early repayment fees and break costs
Long-term loans are often repaid early through a sale, refinance or simply paying them off. The exit cost depends on the rate type and product.
Variable-rate home loans
Lenders have been banned from charging exit fees on new variable-rate home loans taken out since 1 July 2011. You may still pay a discharge or settlement fee to cover the administrative cost of releasing the mortgage, and government fees to register the discharge.
Fixed-rate loans
If you repay all or part of a fixed-rate loan during the fixed period, or switch to variable, the lender may charge a break cost. Break costs are designed to cover the lender's loss when wholesale rates have fallen since you fixed, so they can be small or very large depending on how rates have moved and how much of the fixed term remains. Ask the lender for a written break cost estimate before you sell, refinance or make a large lump-sum payment.
Personal and car loans
Some fixed-rate personal and car loans charge early repayment fees or limit extra repayments; others allow early payout without penalty. Check the contract before you sign, not when you want to leave.
How to choose the right loan term
The right term balances what you can comfortably repay, what the loan is for and how much flexibility you need.
Start from a realistic budget
List your after-tax income and all regular spending, including irregular costs such as car registration, insurance and Tasmanian winter power bills. The repayment needs to fit with a buffer for rate rises and unexpected expenses.
Match the term to the life of the asset
Avoid repaying a car for longer than you will keep it, or a holiday over several years. Long terms suit homes; short terms suit consumables.
Calculate the repayment and total interest for several terms
Use our loan calculator to compare the same loan over, say, three, five and seven years, or 25 and 30 years. Note both the monthly figure and the total interest.
Check the flexibility features
On a longer term, make sure extra repayments are allowed without penalty so you can pay faster in good years.
Compare comparison rates and actual fees
Compare loans on comparison rate first, then check the fees for your actual loan amount and term.
Plan your review points
Diarise when a fixed period ends or when your circumstances are likely to change, and plan to review the loan then.
Refinancing and the term reset trap
Refinancing replaces an existing loan with a new one. Done well, it reduces your rate and fees; done carelessly, it quietly extends your debt by years.
When refinancing can make sense
- Your rate is noticeably higher than what comparable borrowers are being offered.
- Your fixed period has ended and the revert rate is uncompetitive.
- You want features your current loan lacks, such as an offset account.
- You want to consolidate higher-rate debts, with a plan to repay them quickly. See our Debt Consolidation Planning guide.
Worked example: the term reset trap
Example: you owe $400,000 with 25 years remaining at an illustrative 6.5% p.a. Your repayment is $2,700.83 a month and remaining interest would be $410,248.59.
| Option | Monthly repayment | Remaining interest | Compared with staying |
|---|---|---|---|
| Stay: 6.5% over 25 years | $2,700.83 | $410,248.59 | – |
| Refinance: 6.0% over 25 years | $2,577.21 | $373,161.68 | $37,086.91 less interest |
| Refinance: 6.0% over a new 30 years | $2,398.20 | $463,352.76 | $53,104.17 more interest |
The lower rate saves money only if you keep the remaining term. Resetting to a fresh 30 years gives the lowest repayment but more interest than not refinancing at all, before switching costs. Ask for a term matching your remaining term, or keep paying your old repayment.
Costs of switching and getting ready
Allow for discharge fees, application, valuation and settlement fees, government registration fees, any fixed-rate break costs, and LMI if your loan-to-value ratio is above 80%. Weigh these against the interest saving over the period you expect to keep the loan. Our free Home Loan Readiness Review helps Hobart and Tasmanian borrowers organise their documents first, and our guide to how lenders assess your loan application explains what lenders look at. Hobart Loans is not a lender; where you want credit we may refer you to a licensed broker or lender, and we disclose any referral fee first.
Want to see how term, rate and extra repayments change your own numbers?
Open the loan calculator
Frequently asked questions
Is a longer loan term always more expensive?
At the same interest rate and fees, yes: a longer term means you pay interest on a higher balance for more months, so total interest rises. The exception is when you take a longer term but make extra repayments, in which case the cost depends on how fast you actually repay.
Should I choose a 25-year or 30-year home loan?
A 30-year term gives lower minimum repayments and more breathing room; a 25-year term costs less in interest. Many borrowers choose the longer term for flexibility and then pay extra each month, but that only works if you actually make the extra payments and the loan allows them without penalty.
Why does the comparison rate differ from the interest rate?
The comparison rate includes most upfront and ongoing fees as well as the interest rate. It is calculated on standardised examples ($30,000 over five years for personal loans and $150,000 over 25 years for home loans), so it may not exactly reflect your own loan amount and term.
Can I shorten my loan term later?
Often, yes. You can ask your lender to reduce the remaining term, which raises your minimum repayment, or simply make voluntary extra repayments. Voluntary payments keep more flexibility, because you can stop if your circumstances change.
Will refinancing reset my loan term?
It can. Many new loans default to a 25- or 30-year term. If you have already paid down part of your loan, ask for a term that matches your remaining term or keep paying your previous repayment, otherwise a lower rate may not save you money overall.
