There are lots of situations in life where it can be a good idea to seek out a personal loan.However, with so many products on the market, when it comes to financial loans, it can sometimes be difficult to know whether you are looking at the right type of product for your own current situation.
A long-term loan is a loan which is paid in full to you immediately once you are accepted. You are then bound to repay the loan in regular installments over a period of time arranged with the bank or another lender. Interest is accumulated on the loan throughout the period of time during which you repay it. This means that the longer the term of the loan, the more expensive it will turn out to be by the time it is fully repaid. For this reason, long-term loans are really only advisable when you need to borrow a substantial amount of money and you should always choose the shortest time you can pay the loan back in.
So, is a long-term loan the right solution for you right now?
How much do you need to borrow?
The first thing to think about is whether or not the amount that you need is higher than the amount that you can attain or repay with a shorter term loan. Short-term loans will cost you less in total, however, you may not be able to get a shorter loan for the amount that you need if you require a significant lump sum, and you also need to make sure that the monthly repayments you are committing to are going to be feasible for you to repay without any problems.
Taking a long-term loan means that you are paid the full amount but borrowers will need to pay it in regular installments over a period of time. (Source)
How much can you realistically afford to pay back monthly?
Before you think about how much you want to take out, you need to consider other things. You need to do all you can to increase the possibility of getting a business loan. The most important calculation you can make when deciding on the right type of loan is working out what you can afford to repay monthly. This can be difficult when the loan period extends far into the future. For example, you may not know how much you will be earning in eight years time, so it is best to consider your current circ*mstances and also the worst-case scenario. If the amount that you can repay monthly is enough that you can take out a short-term loan, then a long-term loan may well be a more expensive option and not the best one for your needs.
What is the loan for?
Another thing to consider is what you actually need the loan for. If it is for something that there are specific loans also available for, for instance starting a business or buying a car, it can be better to look into financial products geared towards people in those situations. These may offer an alternative that you can compare with the long-term loans available to you to see which option is best.
Long-term loans from reputable companies can be a great way to get money that you need when you need it, and repay it over time. However, it is very important to establish before you even apply for any loans that you have fully investigated your options, worked out exactly how much you need and can afford, and checked out the different products available from different lenders.
—
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
Boris Dzhingarov graduated from the University of National and World Economy with a major in marketing. The founder of Cryptoext, he writes for several sites online such as SEMrush, Tweakyourbiz and Socialnomics.net. Boris is the founder of Blog For Web and MonetaryLibrary.
FAQs
Before taking on any new form of debt, including personal loans, you'll want to evaluate how the monthly payments fit into your budget. With a short-term personal loan, monthly payments tend to be higher; with a long-term personal loan monthly payments are likely to be smaller, which allows for more budget flexibility.
Is bank loan a long-term loan? ›
This loan comes with significantly higher repayment tenures, and you can repay it over an extended period of time, usually ranging from 3 years to 30 years. Examples of long-term loans include Home Loans, Car Loans, Two-Wheeler Loans, Personal Loans, Small Business Loans, to name a few.
Why might someone choose to have a longer loan term? ›
Some of the biggest benefits of choosing longer repayment terms on personal loans include the following: Your monthly payments are lower. The longer you take to repay your loan, the lower the monthly payments will be. Say you take out a $10,000 personal loan at 10% interest.
Is it better to have a longer or shorter loan term? ›
In general, the longer your loan term, the more interest you will pay. Loans with shorter terms usually have lower interest costs but higher monthly payments than loans with longer terms.
Are long-term bank loans risky? ›
For most long-term loans, a form of security or collateral is needed. Borrowers often use a house as security to get the money they need, especially if the interest rates are low. Secured loans may have lower interest rates than unsecured loans, but if you can't make the payments, your assets or home could be at risk.
Is long term loan good? ›
Long-term loans provide lower interest rates because of the amounts included and the extended repayment tenure. The interest rate is generally influenced by the loan amount, income source, tenure, and credit history of the individual. When the loan amount increases, the rate of interest can be reduced significantly.
Is a long term loan better? ›
With a short-term personal loan, monthly payments tend to be higher; with a long-term personal loan monthly payments are likely to be smaller, which allows for more budget flexibility. On the flip-side, this can mean you're paying more in interest over the life of the loan.
What are the disadvantages of long term financing? ›
Higher Interest Rates
The first con of long-term financing is that it can result in a higher interest rate. So while the lender can look forward to a stream of income for a more extended period, on the other hand, they'll be facing long-term risk too.
What are the disadvantages of a term loan? ›
However, there are also drawbacks to term loans, including:
- May require collateral, such as business assets to secure the loan.
- May be more difficult to qualify, especially for businesses with a lower credit score or being in business for a short period of time.
Disadvantages of long-term debt financing:
It is not good for the company which raises equity also. A boost in the cost of debt causes an increase in the expense of equity also. It can be hazardous to the reputation and goodwill of the business. If a company defaults, its credit reliability is likewise get affected.
It may seem like lenders would prefer longer loan terms due to the higher total interest fees. But longer loan terms can be risky for lenders. Personal loans often have a fixed interest rate, meaning it does not change throughout the loan term.
Is a 60 month personal loan bad? ›
60 Month Loans could be a good choice for subprime borrowers looking for small personal loans, but be prepared for origination fees and high APRs.
How long should a loan term be? ›
Typical personal loan terms vary by lender, but are often two to seven years. Some lenders offer terms as long as 12 years, but that's typically if you've borrowed a large amount. A personal loan with a term of three years or less may be considered a short-term loan.
What is the riskiest loan for a bank to give? ›
What are high-risk loans?
- Secured loans: These loans require you to put up an asset, such as your car or house, as collateral to secure the loan. ...
- Car title loans: This type of secured loan requires you to give your car title over to the lender until the loan is repaid (or you forfeit your ownership).
Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan. Defaults can occur on mortgages, credit cards, and fixed income securities.
What is the interest rate on a long-term loan? ›
In case of long-term loans, the interest rate can be either fixed or floating type. The interest rates hover between 8.90% and 12%, depending on the type of loan. One must check the interest rates with different banks before finally applying to a particular lender.
Is bank loan short or long term finance? ›
Bank loans can be short term or long term, depending on the purpose of the loan. Bank loans are frequently used to finance start-up capital and also for larger, long-term purchases.
Is bank loan a short-term loan? ›
Short term loans are called such because of how quickly the loan needs to be paid off. In most cases, it must be paid off within six months to a year – at most, 18 months. Any longer loan term than that is considered a medium term or long term loan. Long term loans can last from just over a year to 25 years.
What is considered a long term loan? ›
There's no official rule for what makes a loan “long term” — but, in general, personal loans with repayment terms of 60 to 84 months (five to seven years) are considered long term.
Is bank loan a short term debt? ›
It can also get known as a bank plug since it's often used to help fill a gap between financing options. Short-term bank loans are also some of the most common types of short-term debt. Another type of short-term debt is commercial paper, which is an unsecured debt instrument that gets issued by a corporation.
