How do loan terms generally affect the cost of credit?

The correct choice is based on the understanding of how loan terms impact both monthly payments and the total cost of borrowing. Shorter loan terms typically result in higher monthly payments because the total amount borrowed must be repaid over a shorter time frame. However, because the loan is paid off more quickly, the borrower pays less interest overall compared to a longer-term loan.

When a loan is extended over a longer period, the monthly payments are indeed lower, making it seem more manageable in the short term. However, this also means that more interest accrues over the life of the loan, which increases the total cost of borrowing. Therefore, while shorter loan terms lead to higher monthly payments, they also minimize the total interest paid, making them more cost-effective in the long run.

This understanding is crucial when borrowers are evaluating their options and determining what loan structure aligns with their financial goals.